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Capital Gains Tax and Estate Administration - A Summary

on Monday, 07 June 2021.

Capital gains tax (CGT) is a tax that arises when a person disposes of an asset and makes a profit that is capital in nature.

However, when someone dies there is a CGT-free uplift in the value of all assets in the estate that are assessed to inheritance tax. Such assets are rebased for CGT purposes and so are 'acquired' by the personal representatives at the probate value without any CGT arising - even on assets that have appreciated considerably in value during the deceased's lifetime.

Estate Administration

The starting point therefore is that personal representatives do not have a CGT liability on the property or assets in the estate. However, if during the estate administration period a property or an asset is sold for more than the value at death, a CGT liability may arise. The calculation of tax is based on the net gain realised on sale, with the rate of tax being 20% for most assets, but 28% for residential property. Personal representatives have the same CGT-exempt allowance as the deceased, which for the 2021/22 tax year is £12,300. This is available for the tax year of death and the two subsequent tax years.

It may be necessary to complete an estate tax return or, if the gain is small, return the gain using the informal procedure (subject to HMRC's approval). A return may be required even if there is no CGT to pay. If there are capital losses that the personal representatives wish to use to stay within the CGT allowance, the personal representatives will have to report all of the gains and losses even if no CGT is payable. 

Beneficiaries who inherit assets from the estate will receive them at their probate value. However, this means that if they sell or give an inherited asset away, they may have to pay CGT on any gain realised by the disposal. It is important that beneficiaries are informed of the acquisition values of assets they inherit.

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It should be noted that any CGT liability that was payable because of disposals made before death will remain payable and due to HMRC. These liabilities must be settled by the personal representatives.

Residential Property

The Government has introduced new reporting requirements for UK residents who dispose of residential property on or after 6 April 2020.

If there is any CGT due, it must be reported within 30 days of the completion of the sale using the HMRC online reporting system.

If no CGT is due on the sale because any capital gain is completely covered by the main residence relief for CGT (where the sale is of a person's main or only home) or it is an inter-spouse transfer, there is no 30-day requirement to report.

However, in most other cases it is necessary to report the disposal of a residential property in the UK within 30 days if there is a potential liability to CGT because of that disposal, even if no tax is actually due. This includes a situation where the gain is covered by the annual exemption, or where the gain is offset against capital losses. The personal representatives should also be aware that payment of the tax is also required within the 30-day period. This represents a significant change to the normal reporting and payment deadlines for UK taxpayers.

Taxpayers who file an annual self-assessment return must also include details of the gain on their annual return.

What Does the Future Hold?

The Office of Tax Simplification (OTS) published a report on CGT in November 2020, and recommended abolishing the CGT-free uplift on death. The removal of this tax-free rebasing could mean that both IHT and CGT become payable on the same assets and as a result of the same event (death of the owner).

More information will be needed to show how this would be calculated in practice, however there have been suggestions that the removal of the uplift would encourage people to give away more of their assets during their lifetime, rather than retaining assets that are then inherited on the owner's death. No changes have been announced, but as the pandemic has left a large hole in the public finances, tax rises are to be expected, and CGT is seen as an area that may be targeted.

For legal advice on CGT and estate administration, please contact Elizabeth O'Connell-Coyne in our Private Client team on 020 7665 0932, or please complete the form below.

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