When is capital gains tax required during an estate administration?

There are various issues that need to be considered when administering an estate. Whilst many people will be aware that inheritance tax (IHT) may arise and that there are exemptions and reliefs that may possibly be available to set against that tax, not everyone is aware of capital gains tax (CGT).

CGT is not a death tax, but it can arise during the administration of an estate. Careful planning by the executors can, however, minimise or eliminate a CGT liability.

When might capital gains tax be implemented?

When an estate includes a property

A common case where CGT may become payable is where there is an estate which has paid IHT and where one of the assets in the estate is a property. The value of the property as at the date of death will be agreed with HMRC and IHT paid.

Ordinarily it will be the case that the property is sold within the course of the administration. However, it is often sometime after the date of death that the property is marketed for sale due to the need to obtain a Grant of Probate to enable a sale to proceed.

When a property’s value has increased

It may well be the case that the value of the property will have increased during that time so that the property sells for a greater amount than the date of death value. It is at this point that CGT may become an issue. Broadly speaking CGT is payable on the difference between the sale value and the date of death value.

The executors have an annual allowance to set against this gain, in the current tax year this amounts to £12,300, and they can also set against the gain costs associated with the sale and some other small allowances, but it could still be the case that the gain exceeds those allowances and CGT will then be payable on the balance taxed at 28%.

It should be noted that the executors’ annual allowance is available in the tax year of death and the following two tax years but after that time it is not available even if the estate administration is not completed

How can capital gains tax be reduced?

With careful planning it may be possible to mitigate some or all of the CGT payable. If the estate is left to a number of beneficiaries, then the executors could appropriate the property so that it is deemed to be the property of those beneficiaries. Each of those beneficiaries has their own personal allowance for CGT purposes and, if they have not used that allowance for assets that they have disposed of then, potentially, that entire allowance will be available to set against the gain.

For example, a Will leaves an estate to four children. If the property is appropriated to those children, then there are four CGT allowances to set against the gain. This could mean that there is a situation where the value of the property has increased quite significantly since the death but that the entire gain is free of CGT.

Is capital gains tax implemented on assets other than property?

Whilst property is one type of asset where CGT may be an issue during the administration of an estate, it can also arise where shareholdings are held. Here again, with careful planning, it may be possible to eliminate, or at least reduce, any CGT by selling shares over a period of time, selling some in one tax year and others in another.

It would also be possible to appropriate shares to beneficiaries where those shares have increased in value since the date of death.

How Moore Barlow can help

For more information on estate administration and tax please contact one of the team in the Private Wealth and Tax Team at Moore Barlow.