Capital Gains Tax And Estate Administration
What is Capital Gains Tax?
This is tax you pay on the sale of an asset that has increased in value, which exceeds the current annual allowance of £3,000.
When a person dies, Capital Gains Tax may already be payable if the deceased sold assets that incurred a chargeable gain in the tax year prior to death. The personal representative would be responsible for declaring this to HMRC and settling any tax due.
This article focuses solely on any Capital Gains Tax payable because of assets being sold during the administration of a deceased’s estate (post-death gains).
Properties and shareholdings are the most common examples of assets that may attract Capital Gains Tax liability. Other assets, such as personal possessions and business interests are also considered and you should always seek legal advice if you have any uncertainty on whether an asset is subject to Capital Gains Tax or not.
Capital Gains Tax is often overlooked when dealing with the administration of a person’s estate, and it will not always apply, but you should always be alert to the possibility of a tax liability arising during the administration period.
How is Capital Gains calculated?
Capital Gains Tax is paid on the gain in value on one or more sold assets. During the estate administration period, the gain on a deceased’s persons assets is determined from the value of the asset at their date of death until the date the asset is sold. It is irrelevant whether your loved one bought the asset decades ago, which is a very common misconception.
Example: If Mr A bought a house in 1960 for £30,000 but the house is now worth £500,000 at his date of death in 2024, it is the 2024 figure that is used as the starting point when considering Capital Gains Tax. It is for this reason, amongst others, that assets should always be accurately valued at the date of death.
Tax is payable on the difference between the sale value and the date of death value. So, if Mr A’s house was sold during the estate administration period for £500,000, there is no gain.
However, if the house sold for £550,000 there is a gain of £50,000 and this gain will be subject to Capital Gains Tax. The same principle applies to other assets, such as shares, which fluctuate in value during the estate administration period.
It is important that you consider the potential Capital Gains Tax liability before selling an asset, as there are things that can be done to mitigate the tax due.
What is the Capital Gains Tax rate?
On 30 October 2024, the Government announced that the Capital Gains Tax rate applicable to personal representatives would be increasing to 24%. This includes gains made on residential properties.
Example: Mr A’s asset has incurred a £50,000 gain. After deducting the allowable relief of £3,000, 24% tax will be applied upon the remaining £47,000. This would be a tax liability of £11,280 and is payable following sale of the asset.
What can be done to mitigate tax?
(a) Annual Allowance
Capital Gains Tax will only arise on gains over £3,000; anything below this does not need to be considered. Personal representatives of the estate have an individual exemption of £3,000 separate from their own affairs, which is applied to gains on estate assets. The personal representatives can apply this exemption in the tax year in which the deceased died and in the following two years after death.
One option to consider is staggering the sale of an asset. For instance, when considering shareholdings, the personal representative may sell a portion of the shares in the year of death utilising the first £3,000 allowance. They can then sell a further portion in the following tax year to utilise that year’s allowance and so forth. It is important to remember that the annual allowance can only be used in an additional two tax years following death.
The annual allowance can only be applied during the estate administration period i.e. from the date of death to the date the estate is distributed to the beneficiaries.
(b) Appropriating Assets
Assets in an estate can be appropriated to one or more beneficiaries of the estate to utilise more than one allowance. This is done by way of Deed of Appropriation.
Example: Mr A left a Will under which his four children are equal beneficiaries. As it stands, the personal representatives only have a £3,000 allowance to offset against the £50,000 gain. The beneficiaries have agreed to the property being appropriated to them and they will each use their individual allowances to mitigate the tax liability. This means that £12,000 is now offset against the gain opposed to the £3,000.
It is important to note that everyone has an allowance of £3,000 per year. If one of the beneficiaries have incurred a chargeable gain in that same tax year, they cannot use their allowance again on the deceased’s asset.
The Deed of Appropriation must be prepared and signed before the asset is sold and you should seek legal advice to ensure this is done correctly.
(c) Expenses
Properties in particular may require works to be carried out on it before it can be sold. This does not include decoration costs or general cosmetic work, but does include improvement works such as replacement electrics, extensions etc.
These costs are allowable deductions and can be offset against any gain. Other allowable expenses include estate agent and solicitor fees in selling a property.
For example: Mr A’s house was valued at £500,000 at the date of death. Several remedial works needed to be carried out before taking the house to market and the personal representative incurred costs of £40,000 in doing these. The house was then valued at £550,000 for sale purposes. After deducting the improvement works and the £3,000 annual allowance, the gain on the property is now £7,000 which is subject to 24% tax.
d) Transferring assets
Transferring an asset to a beneficiary will not give rise to a tax liability at the date of transfer as it is not considered a disposal of the asset. For instance, if a child of the deceased wished to keep the family home and transferred it into their name, no tax would be payable at the date of transfer irrespective of the change in value.
However, if the beneficiary then sold the asset later, the gain would be calculated from the deceased’s date of death known as the “deemed purchase price”.
For example: one of Mr A’s children decides they want to keep a share portfolio Mr A previously purchased for £25,000 as their share of the estate. At Mr A’s death, the shares were valued at £50,000 (a £25,000 increase from the initial purchase). After four years, Mr A’s child decides they want to sell the shares which are now valued at £100,000 . The gain on the shares is £50,000 as the deemed purchase price was £50,000 (value at death).
Mr A’s child can only rely on their own annual allowance of £3,000 to mitigate the gain and cannot rely on the personal representative’s allowance. They will also need to consider individual Capital Gains Tax rates when determining the tax payable, as it is no longer an estate asset. As of 30 October 2024, these are 18% for basic rate taxpayers and 24% for higher rate taxpayers.
Ryan, Nicola and Rafia are all solicitors specialising in this type of work. For more information, or to arrange an appointment to discuss your individual needs and how we can help you, contact us on 0161 764 5266.
