Capital Gains Tax (CGT) is a tax paid on the increase in value of an asset between the date it was acquired and the date it was sold.
- Calculating CGT
When a person dies, their personal representatives (PRs) are deemed to have acquired the estate assets at their date of death value. If the PRs later sell those assets for a gain, there may be CGT to pay on the sale of those assets. Any gain will be calculated using the net value of the assets after deducting the costs of sale.
If assets are sold in the tax year in which the deceased died, or in the two tax years following the deceased’s death, the PRs can offset the Capital Gains Tax Annual Exempt Amount (AEA) against any gain made. The current annual exemption for the 2020/21 tax year is £12,300.
Where there is a chargeable gain, tax will be charged at the following rates –
- 20% for gains on assets other than residential property
- 28% for gains on residential property
Mr Smith dies in January 2020 leaving a property worth £300,000. The property is sold in January 2021 for £325,000. The estate agents commission is £3,900 and the solicitor’s fees are £1,800. The chargeable gain is calculated as follows –
Sale price £325,000
Less DOD value -£300,000
Less costs of sale -£5,700
Less AEA -£12,300
£7,000 x 28% = £1,960 CGT to pay
- Reducing CGT liability
The estate CGT liability can be reduced if assets which have made a gain are appropriated to one or more of the estate beneficiaries before those assets are sold. By appropriating these assets, the PRs will be treated as having sold the assets as bare trustees for the beneficiary/beneficiaries, who will then have to account for the gain as part of their own tax affairs. This means that the PRs can take advantage of the Annual Exempt Amounts of each individual beneficiary.
The PRs intend to sell an estate property for a net gain of £30,000. Once the AEA of £12,300 is deducted there will be a taxable amount of £17,700. There are three residuary beneficiaries who each have their own individual AEA of £12,300. The PRs can appropriate the property to the three residuary beneficiaries to utilise these individual allowances. By appropriating the property, each beneficiary will be responsible for 1/3rd of the gain, which will be covered by their own AEA. This therefore completely removes the CGT liability.
To appropriate assets to a beneficiary the PRs will need to sign a simple memorandum of appropriation.
- Appropriation to charity beneficiaries
Where PRs appropriate assets to charity beneficiaries there will be no CGT to pay as charities are exempt from paying CGT. It is therefore quite common for assets to be appropriated to charities to take advantage of this exemption.
However, where land or a property is appropriated to solely charity beneficiaries the provisions in s.117 – 123 of Charities Act 2011 will apply. This is because the PRs will be selling the property as bare trustees for the charities and the property will therefore be treated as ‘charity land’. The main requirement of these provisions is that a report must be obtained prior to exchange of contracts from a qualified surveyor to confirm that the agreed sale price is a fair price for the property.