Capital Gains Tax

Did you know that if you are an executor or Personal Representative (PR) of a deceased person you can make slight alterations to their Will without changing what they intended and, in doing so, make a saving in Capital Gains Tax?

Personal Representatives (PR’s) are the people legally entitled to administer an estate. When someone passes away, their PR’s are taken to have acquired the assets of the deceased person at their market value at the date of death. If the value of an asset increases before it is sold by the PR’s at a later date, the PR’s could be responsible for paying Capital Gains Tax (CGT) on the increase.

PR’s pay CGT at higher rates, currently 20% or 28% on land. They also have an annual exemption for a limited period, currently £12,300, and can set any losses against their gains.

Assets sold during the administration of an estate can be sold by the PR’s directly or could be sold on behalf of a beneficiary. To sell an asset on behalf of a beneficiary, the PR’s would have to formally assign the assets to a beneficiary and then sell on their behalf.

When an asset has been formally assigned to a beneficiary, the CGT is calculated based on the beneficiary’s position, using their personal annual exemption, instead of the PR’s. The advantage being that the beneficiary may pay CGT at lower rates and may also have personal losses available to offset the gain. This will often reduce the CGT liability.

An alternative scenario worth considering is when the PR’s have losses. This would arise if an asset sold for less than it was worth at the date of death. PR’s cannot pass these losses on to beneficiaries. Rather than write off these losses, where the PR’s identify that the sale of an asset will realise a loss and they do not have gains to offset against the loss, they may consider assigning the asset to a beneficiary before it is sold. Even if the beneficiary has no current gains to offset against the loss, the losses can be carried forward indefinitely by the beneficiary. The losses would therefore be available to the beneficiary in the future to reduce their liability for any capital gains they may make in the future.

While how an asset is sold can impact the CGT liability, the PR’s must ensure that they have checked the provisions of the Will carefully, particularly ensuring that the proceeds of the sale are not required for other purposes and assess the full tax position as each estate will be different.

If you would like some more advice about this, please do not hesitate to contact Emma Moffat on 01992 422128.