How is an estate taxed on death and during its administration? Part 1
Although upon a deceased’s death the personal representatives are often aware of the need to consider the Inheritance Tax (IHT) position, it is easy to overlook potential liability for two other taxes – Capital Gains Tax (CGT) and Income Tax.
We have previously looked at the circumstances in which a deceased’s estate is liable to a charge to IHT. In the first of two articles we take a look at the key CGT issues that personal representatives should bear in mind when administering a deceased’s estate. Next week, we will turn our attention to those relating to Income Tax.
Pre-death and post-death considerations
When someone passes away, the period of time between death and the date the deceased’s personal representatives have finalised distributing the assets (either in accordance with the terms of the Will or otherwise the rules of intestacy) is known as the period of administration.
For taxation purposes it is crucial to distinguish between this period and that leading up to the date of the deceased’s death as the tax implications are separate.
No CGT is charged on any increase in value of chargeable capital assets, such as property and shares (the deceased’s main residence and cash are exempt from CGT) held by the deceased up to the date of death. This is commonly referred to as the tax-free uplift and any pre-death gains from the date of acquisition are effectively ignored. The beneficiary acquiring the relevant asset from the estate is treated as if they had paid the market value at the date of the deceased’s death.
However, CGT is still a relevant consideration for personal representatives because it applies to any gains on any assets disposed of by the estate during the period of administration, save for those transferred to the beneficiaries. Personal representatives may need to sell assets in order to use the sale proceeds to settle outstanding liabilities for instance.
Generally speaking, subject to various deductible allowances accepted by HMRC such as the costs associated with marketing a property for sale, tax due on any gains arising can be worked out by subtracting the sale proceeds from the date of death value.
Personal representatives are entitled to utilise the deceased’s annual exemption for CGT, currently worth £12,000, for the period from the date of death to the end of the next tax year of 5 April. It is irrelevant how short this period may be. Furthermore, the personal representatives are entitled to claim this annual exemption in each of the following two tax years.
Personal representatives may want to use their powers of appropriation assets prior to sale of assets, to maximise available exemptions, depending on the circumstances of the beneficiaries and the amount of gains.
Subject to the available allowances, the rate of tax on any chargeable capital gains on disposals made by the estate is currently 28% for residential property and 20% for other assets. The personal representatives are responsible for paying any CGT due out of the estate. Depending on the amount of CGT due, it may also be necessary for a tax return to be completed.
It can therefore be seen that personal representatives not only need to be aware of issues relating to IHT but also may need to consider a variety of different CGT implications when administering an estate. The issue of tax needs to also be considered by trustees dealing with trusts incorporated into a deceased’s Will or created during their lifetime.
Next week we will consider issues associated with Income Tax.
If you require any assistance in dealing with a deceased’s tax affairs or indeed need advice in administering an estate more generally, then please do not hesitate to contact a member of the Tax and Estate Planning department today.