When thinking about taxes for a deceased person’s estate, most people only really think about the dreaded Inheritance Tax at 40%. The law also imposes that both Income Tax and Capital Gains Tax (CGT) may be payable in an estate administration.
The period between date of death and the end of the administration of an estate is known as the “period of administration” and the Personal Representatives are responsible for reporting and paying any Income Tax and/or Capital Gains Tax due for that period on top of any Inheritance Tax that may be payable.
When a person dies, the Personal Representatives of their estate receive their assets at the value they were on the date that they died. For Capital Gains Tax purposes this is the acquisition value against which any later disposal will be assessed when calculating if a Capital Gains Tax liability has occurred.
A common situation giving rise to a Capital Gains Tax liability in the administration of an estate is on the sale of shareholdings or the sale of the deceased’s home. The instability of market forces means that the value of these assets can increase or decrease rapidly from date of death to the point where a grant has been issued and the property can practically be sold.
Where gains do occur in an Estate, they are subject to higher rates 28% for Residential Property and 20% for other assets.
It is possible for the Personal Representatives to reduce the gain by making use of their ‘Annual Exemption’ (currently £12,300) and by deducting any associated costs of the disposal. It is important to note that no matter how many Personal Representatives there are of an Estate, only one annual exemption can be claimed. However, we will see later methods of reducing the liability further.
A very rough example of a Capital Gains Tax liability based on these basic principles above can be observed as follows: -
Example 1 - Matthew, David and Alison
- Value of the property at date of death: £ 300,000.00
- Value at the date of sale: £ 330,000.00
- GROSS GAIN £ 30,000.00
- Annual Exemption £ 12,300.00 (LESS)
- Disposal Costs (EG: Legal Fees/Agent Fees) £ 5,000.00 (LESS)
- NET GAIN £ 12,700.00
- Capital Gains Tax @ 28% £ 3,556.00
Reducing the GROSS Gain further by “Appropriation”
Under s41 Administration of Estates Act (1925), the Personal Representatives have a statutory power to appropriate the beneficial interest in assets to beneficiaries as a part of their entitlement, where that asset is no longer needed for the administration of the estate. A Deed of Appropriation can reduce the GROSS gain by passing the underlying beneficial title to the asset to the Beneficiaries before it is sold. This means that it is held on their behalf by the Personal Representatives as Trustees for the beneficiaries instead of on behalf of the Estate.
The result is that (if available) the beneficiaries' personal “Annual Exemptions” can be put against the GROSS gain when the asset is sold, instead of just the Personal Representatives single exemption. For example, if there are three beneficiaries, three “Annual Exemptions” could be claimed.
This could, in principle mean that provided you had enough exemptions to reduce the gain, the liability could be wiped out completely.
All is not lost if this isn’t the case, because if the gain can’t be completely wiped out where the beneficiaries are basic rate taxpayers, as the tax payable would be at lower rate than it would be for the Estate (for residential property this rate is 18%, compared to 28% if sold through the Estate).
WORKING EXAMPLE OF AN APPROPRIATION
Matthew, David and Alison are the residuary beneficiaries of their late father's Estate.
At date of death, his property was valued at £300,000.00.
Over the course of the Estate administration the property has increased in value and the Personal Representatives of the Estate have accepted an offer to sell the property for £330,000.00.
The £30,000.00 difference is liable for Capital Gains Tax.
As Matthew, David and Alison have not made any chargeable gains during the current tax year, they decide that they would like the property to be appropriated to them before it is sold. A Deed of Appropriation is drafted and signed by all three of them ahead of exchange of contracts on the property sale.
As a result, the beneficiaries can apply three Annual Exemptions of £12,300.00, meaning that they have a total allowance of £36,900. As this exceeds the £30,000 gain on the property, there will no longer be any Capital Gains Tax liability to pay.
We can now recalculate our previous Example as follows.
Example 2 - Matthew, David and Alison
- Value of the property at date of death: £ 300,000.00
- Value at the date of sale: £ 330,000.00
- GROSS GAIN £ 30,000.00
- Annual Exemption £ 36,900.00 (LESS)
- Disposal Costs (EG: Legal Fees/Agent Fees) £ 5,000.00 (LESS)
- NET GAIN £ 0.00
- Capital Gains Tax @ 28% £ 0.00
It is important to note that an appropriation can only be completed where the asset is no longer required for the administration of the estate. For example, if there are no liquid assets in the estate and the proceeds of sale an asset is required to settle some outstanding debts/liabilities of the estate, the appropriation cannot take place as this would leave the estate insolvent. This is because the effect of an appropriation is that it passes the beneficial title of the property to the beneficiaries meaning that the Personal Representatives no longer are entitled to the asset.
In times of economic instability and the everchanging market forces, it is important as a Personal Representative to ensure that you consider all possible steps to maximise the estate for its beneficiaries to avoid criticism or claims of maladministration. Always consult a lawyer to deal with an estate administration on your behalf, it could just help you save money where you didn’t know you could and avoid claims you didn’t know could be made.
I hope this article is helpful and if you need any help with an estate administration feel free to contact me or a colleague.
Please feel free to call me if you have an estate you wish to discuss.
Telephone Matthew Ainsworth – 01677 422422
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NOTE: Values and exemption correct at the time of publishing.
