Date posted: 3rd Jun 2021
When a person passes away, the value of assets in their estate are usually revalued to market value, at the date of death, for capital gains tax purposes. This occurs regardless of whether the estate is subject to inheritance tax.
Many estates include property, whether there is a main home, second home or investment properties. Where these are sold post death, the issue of whether a capital gains tax liability arises, will need to be considered.
Who is selling?
It is important to understand the party that is selling the property, as this can alter the tax treatment.
It will therefore be necessary to determine:
- whether the executors or administrators are selling the property, for example, to realise cash to distribute to the beneficiaries or pay Inheritance Tax, or
- whether legal title has been transferred to the beneficiary/beneficiaries, who have decided to sell.
Sale by executor or personal representative
Where a property is sold by the executor or personal representative following the deceased’s death, the estate may be liable for any capital gains tax, depending upon reliefs available such as annual exemptions and main residence relief. Main residence relief will not be available, in most cases, for the period following the death i.e. the period of time that the deceased lived in the property prior to death is ignored. Capital gains tax is payable on the difference between the value at the date of death and the sale proceeds. Executors are entitled to the annual exemption for the tax year in which the death occurred and the following two tax years. After that, there’s no tax-free annual exemption. Executors pay capital gains tax on residential properties at a rate of 28%.
Capital gains on residential property must be notified to HMRC within 30 days of completion. The associated capital gains tax should be paid at the same time.
Sale by the beneficiary
If legal title to the property is transferred to beneficiaries, following the deceased’s death, the beneficiaries’ base cost for capital gains tax purposes is the market value, of the property, at the date of death.
If the beneficiaries subsequently sell the property and it is not their main residence, a chargeable gain will arise. They will benefit from their own annual exempt amount to the extent not used elsewhere and any available capital losses. The gain will be charged at the appropriate residential rate. This may be lower than the rate on which Executors are taxed i.e. it could be at a rate of 18% or 28% depending on the other income or gains of the beneficiary making the disposal.
Similarly, the gain must be reported to HMRC within 30 days and the tax paid within this window.
Planning a sale
Given the difference in treatment, it is important that planning is undertaken ahead of a sale, to determine whether the property is sold by the personal representatives or the beneficiaries.
If you need tax advice in relation to any matters relating to trust and estates, please give us a call or contact us here.