Death is not an occasion of charge for capital gains tax purposes. Consequently, there is no capital gains tax on inherited property on death. If the value of the estate after reliefs and exemptions exceeds the nil rate band for inheritance tax purposes, inheritance tax will be payable on the excess.
Acquisition cost for the executors or personal representatives or beneficiaries
The general rule is that capital gains tax on inherited property on subsequent disposals by the executors or personal representatives and beneficiaries is calculated on the basis that the property was acquired at market value at the date of death. However, this general rule is amended if the value of property needs to be “ascertained” for the purposes of inheritance tax on death (see below).
What is “market value”?
The capital gains tax legislation defines market value as “…. the price which assets might reasonably be expected to fetch on a sale in the open market.” However, the legislation also provides that “in estimating the market value of any assets no reduction shall be made in the estimate on account of the estimate being made on the assumption that the whole of the assets is to be placed on the market at one and the same time.”
The rule on determining market value for inheritance tax purposes is worded slightly differently to the capital gains tax legislation but its effect is the same.
As set out below, where the market value of a property has been “ascertained” for IHT purposes, that value is also used for capital gains tax purposes.
If the market value has not been ascertained for IHT purposes and there is likely to be a capital gains tax liability on a future disposal either by the executors or personal representatives or by a beneficiary, it may be wise to obtain a professional valuation as at the date of death. Note that it may be unwise to rely on an estate agent’s valuation for sale, and ideally valuations should be “Red Book” valuations; the Red Book in question being the Royal Institution of Chartered Surveyors’ guidance on property valuations, the principles of which are accepted by professional valuers and HMRC’s valuers alike.
If HMRC questions the market valuation adopted by the executors or personal representatives or beneficiary, it may arrange for a valuation to be made by the District Valuer. If the market value of property situated in the UK cannot be agreed, the taxpayer may appeal to the Upper Tribunal (Lands Chamber) if the relevant property is in England and Wales and to the Lands Tribunal for Scotland if the property is in Scotland.
Some deceased estates are “excepted estates”. Excepted estates are estates where a full inheritance tax account is not required to be made to HMRC. There are three types of estate which are excepted estates:
- Estates where the deceased died on or after 6 April 2004, domiciled in the United Kingdom, and whose gross value (including the deceased’s share of jointly owned assets, any specified transfers and specified exempt transfers) does not exceed the inheritance tax nil rate band.
- Estates where the gross value of the estate does not exceed £1 million and there is no liability to inheritance tax because the spouse or civil partner exemption (or charity exemption), bring the estate below the inheritance tax nil rate band.
- The estates of deceased individuals who died on or after 6 April 2002 and who:
- were domiciled outside the UK at the date of their death;
- had never been domiciled in the UK during their lifetime;
- had never been deemed domiciled in the UK for IHT purposes; and
- the value of their estate situated in the UK consists only of cash or quoted shares or securities passing under their will or intestacy or by survivorship, the gross value of which does not exceed £150,000 (before 1 September 2006 this limit was £100,000).
Capital gains tax on inherited property where its value has been “ascertained” for inheritance tax purposes.
If an estate is not an excepted estate as detailed above, the value of the property will have been “ascertained” for inheritance tax purposes. In such cases, capital gains tax on inherited property on future disposals by executors or personal representatives or by beneficiaries will be calculated on the basis that their acquisition cost is the value ascertained for inheritance tax purposes (this is sometimes known as “probate value”).
Capital gains tax on inherited property during the administration period
The period between the day after someone’s death and the date the executors or personal representatives complete the distribution of the deceased’s assets in accordance with the will or the laws of intestacy is known as the administration period. If any property is sold by the deceased’s executors or personal representatives during the administration period, capital gains tax may be payable if the value of the property has risen since the date of death. However, the distribution of an asset during the administration to a beneficiary under the terms of a will is NOT a disposal for the purposes of determining capital gains tax on inherited property.
During the administration period capital gains tax can potentially apply to gains on assets disposed of by the executors or personal representatives. The executors or personal representatives are entitled to the full annual exempt amount for capital gains tax for the administration period – for the tax year in which the death occurred and the following two tax years. Unfortunately, there is no entitlement to the annual exempt amount if the administration period lasts longer than this.
If the executors or personal representatives dispose of a chargeable asset and there is a gain, they will be responsible for paying the capital gains tax out of the estate. Where there is a capital gains tax liability, the executors or personal representatives will deal with the tax office of the deceased or with the tax office of the first-named executor or personal representative if appropriate. The executors or personal representatives may have to complete a special form of tax return (known as a trust and estate tax return) if capital gains tax is due during the administration period. This will not be a personal tax return, but a trust and estate tax return.
From 6 April 2016 onwards, the capital gains tax rate on any chargeable capital gains on disposals by the executors or beneficiaries of residential property is 28%.
The rate of tax on any chargeable capital gains on disposals by the executors or beneficiaries of chargeable assets other than residential property from 6 April 2016 onwards is 20%.
Capital gains tax on inherited property: Deeds of Variation
In certain circumstances, beneficiaries under a will or intestacy may agree to receive assets in a way which is more desirable, frequently to achieve a better result for inheritance tax than would have been possible had the terms of the will or rules of intestacy been observed. This is known as a Deed of Variation.
When a Deed of Variation is made, it is possible to make a form of election for capital gains tax purposes that the capital gains that might otherwise have arisen on the redistribution of assets does not give rise to a capital gains tax charge on the beneficiaries. Instead, the beneficiaries are treated as having acquired the assets on the death of the testator. The Deed of Variation must be executed within two years of the death and must contain a clear statement to the effect that the relevant legislation applies.
Capital gains tax on inherited property for beneficiaries
The rate of capital gains tax for beneficiaries who dispose of inherited property depends on the beneficiary’s individual circumstances and the nature of the property.
For assets other than residential property, from 6 April 2016 onwards, the rate of capital gains tax is 10% to the extent that the beneficiary’s taxable income is less than the income tax basic rate band and 20% on any excess.
For residential property, from 6 April 2016 onwards, the rate of capital gains tax is 18% to the extent that the beneficiary’s taxable income is less than the income tax basic rate band and 28% on any excess.
Gains on all kinds of property between 23 June 2010 and 5 April 2016 were charged at the 18% and 28% rates, dependent on the amount of the beneficiary’s taxable income.
Enterprise Tax Consultants can advise on capital gains tax on inherited property
If you are unsure as to your tax position in relation to capital gains tax on inherited property, we can assist. The services we offer include:
- Advice in relation to your UK income and capital gains exposure
- Advice on inheritance tax planning
- Advice on asset protection strategies
- Advice and assistance in relation to the disposal of UK residential properties
Contact us for a no-obligation initial conversation with an experienced tax adviser.