Tax Factor
01 October 2010
What to do about Capital Gains Tax when someone dies
In the April edition of the Tax Factor we looked at the Income Tax matters that need to be addressed following a death. In this article we take a look at some of the Capital Gains Tax issues that need to be considered by Executors or Administrators as they decide how to deal with the assets of the deceased.
Personal Representatives, whether they are Executors appointed under the terms of the Will or Administrators appointed to act where there has been no Will drawn up, may be faced with selling the deceased's assets. Sometimes the only option may be to turn everything into cash in order to satisfy specific bequests but in other circumstances these legacies are fulfilled by the distribution of assets. Whatever the situation it is important that the Capital Gains Tax (CGT) consequences are not overlooked.
Pre-death disposals
The Executor or Administrator is responsible for ensuring that any outstanding tax returns for earlier years or any return required for the period from the preceding 6 April to the date of death have been completed and submitted and that any liabilities arising have been settled. These may include CGT if the deceased sold assets and made gains in excess of the Annual Exemption for the year or years concerned.
Alternatively there may be capital losses arising in the period from the preceding 6 April to the date of death which exceed the gains made in the same period. Such losses cannot be carried forward and set against gains made on the disposals occurring post-death but they need not be wasted, as they can be carried back and set against gains made by the deceased in the three tax years preceding the year in which the death occurred.
Sale of assets post-death
If there are assets to be sold by the Personal Representatives, such as the deceased's home, then normally whatever value has been put on the asset for Probate and/or IHT purposes becomes the ‘base cost' for determining whether a gain has arisen on the sale. The capital gain arising is then the excess of the sale proceeds over that value, less any costs incurred in connection with the disposal, such as legal fees. The Personal Representatives are responsible for ensuring that the tax is paid out of the funds held in the estate.
If the sale takes place in the period from the date of death to the following 5 April or during the subsequent two tax years then the Annual Exemption in force for those years is available to set against the gains arising. The administration of more complex estates may take some years to complete but Executors and Administrators should review the asset portfolio during this period to ensure that if possible use is made of these available exemptions.
Gains in excess of the Annual Exemption are taxed at 18%, if the disposal was made on or before 22 June 2010, and at 28% if the sale takes place after that date. The Annual Exemption can be allocated in the way that brings about the greatest tax saving so if there are gains chargeable at both rates then the exemption can be set first against those attracting the higher rate of 28%.
It is worth noting that it is only necessary to use the Probate value as the base cost for CGT if this figure has been ‘ascertained' by HMRC for IHT purposes, in other words if a figure has been agreed. If the value of an estate is under £325,000, or the assets have all been left to a spouse, so that no IHT liability arises, HMRC may have simply accepted the values put forward but not strictly speaking agreed these.
In this case it is open to the Personal Representatives to use a different value at the date of death if subsequent events have shown that the original valuation used was likely to have been inaccurate. Personal Representatives should be aware however that whenever a valuation is used this must be indicated on the tax return and HMRC may open an enquiry in order to look at the figures more closely. It is therefore important to ensure that any values used can be justified.
Even if Probate values have been formally agreed, if quoted shares are sold within twelve months or land and property within four years of the death for a lower amount then it is possible to go back and amend the IHT return to reflect the actual proceeds achieved. If the estate was large enough to incur an IHT liability then this will produce an IHT saving (at 40%) but will have an impact on the CGT position. The consequences should therefore be considered carefully.
Assets passing to beneficiaries
Beneficiaries are deemed to have acquired assets at their Probate value even if some time has elapsed between the death and the completion of the formal transfer. If, once ownership has been transferred, the beneficiary later sells the asset for an amount higher than the Probate value then the gain arising will be subject to CGT in the normal way in the beneficiary's hands.
Before Executors or Administrators make a sale they should considered whether it is worthwhile transferring ownership of the asset to the beneficiaries who are to share in the proceeds. Provided the asset is ‘assented' (a form of legal transfer) to the beneficiaries before the sale takes place, any gain arising will be split between them, thereby offering the opportunity to utilise more than one Annual Exemption.
The potential tax savings will of course depend on how many individuals are to benefit, whether they are higher rate taxpayers, whether they have unused capital losses available to set against their share of the gain and so on. These factors should all be considered before a decision is made.
Where to start
The actions that Personal Representatives can take to minimise CGT liabilities, and hence maximise the funds available to the beneficiaries may be limited by the terms of the Will and advice on these aspects should be sought from a lawyer. However Wilkins Kennedy will be pleased to offer advice on the taxation issues that may arise during the course of administering an estate.
