How does the death of a taxpayer affect capital gains tax?
An examination of four key areas to consider.
The people involved would be the individual who has died, the personal representatives (known as executors if there is a will and as administrators if there is no will) and the legatees (the beneficiaries of the estate).
These are affected as follows:
No liability to capital gains tax arises on the death of the individual. If the individual made disposals in the tax year in which death occurs and if the allowable capital losses exceed the chargeable gains, the excess can be carried back and set off against chargeable gains in the three preceding tax years. Chargeable gains accruing in a later year must be relieved before those of an earlier year. However, any allowable losses carried back need not be deducted if this would result in the effective loss of the annual exemption. Where the ‘adjusted net gains’ exceed the annual exempt amount, such losses are deducted only to the extent necessary to reduce the excess to nil. Any remaining unused losses cannot be carried forward and set off against gains made by the personal representatives or legatees.
The personal representatives are treated as having acquired the deceased’s assets at market value at the time of death and are liable to capital gains tax on disposals of assets made by them. Any gain or loss arising on the disposal of the asset by the personal representatives after the death is calculated by reference to the market value of the asset at the date of death. They are entitled to the same annual exempt amount (£12,000 for 2019/20) as individuals for the year of death and the following two years.
No liability to capital gains tax arises on the transfer of assets from the personal representatives to the legatees. The legatee is treated as acquiring the asset at market value as at the date of death.
Following the death of an individual, inheritance tax is chargeable on the value of that person’s estate immediately before the death. The value of assets for inheritance tax purposes is also the value used for capital gains tax purposes on their subsequent disposal, either by the personal representatives or the legatees. In the case of land and quoted shares and securities, proceeds of certain post-death sales within a specified period may be substituted for values at date of death for inheritance tax purposes. If such substitution revisions are made for inheritance tax purposes, they must also be made for capital gains tax purposes. However, this may not be the case if IHT values are increased in circumstances when IHT is not payable.
Two or more different assets comprised in an estate can be treated as a single unit of property if disposal as one unit was the course that a prudent seller would have adopted in order to obtain the most favourable price without undue expenditure of time and effort.
The single asset valuation for TCGA 1992 section 17 is modified by TCGA 1992 section 19 where there is a series of linked transactions between connected persons. Then each disposal in the series may be treated as being made for consideration equal to a proportion of the total value of all assets in the series.
Variations or disclaimers
The legatees may make variations or disclaimers and if these are made within two years of death they do not constitute disposals but are related back to the date of death so that a variation is treated as having been effected by the deceased and a disclaimed benefit is treated as never having been conferred. This treatment does not apply in respect of variations or disclaimers made for any consideration in money or money’s worth other than consideration consisting of the making of a variation or disclaimer in respect of another of the dispositions.
TCGA 1992 section 62(3) says that ‘in relation to property forming part of the estate of a deceased person the personal representatives shall for the purposes of this Act be treated as being a single and continuing body of persons (distinct from the persons who may from time to time be the personal representatives), and that body shall be treated as having the deceased’s residence and domicile at the date of death’.
The personal representatives are liable to capital gains tax on disposals of assets made by them. This is based on the sale proceeds and the market value at the date of death. As they will be responsible for settling the liabilities of the estate they may be assessed in respect of disposals made by the deceased prior to death as well as on their own disposals.
They will be responsible for the preparation of the deceased's self-assessment tax return (if one is required) for the period from 6 April to the date of death. If the deceased made any capital gains in that period before they died the full year’s annual exemption (£12,000 for 2019/20) can be used against the gains and only the chargeable capital gains in excess of the annual exemption with be subject to tax.
The personal representatives will also be entitled to the full annual exemption for disposals they make in the period from the date of death to 5 April following that date. The personal representatives will also be entitled to the full annual exemption for the following two tax years.
Personal representatives, when computing chargeable gains on the disposal of assets, can add to the market value at the date of death the legal and accountancy costs that are involved in preparing the inheritance tax account and obtaining the grant of probate etc. However, sometimes it is difficult to identify the costs applicable to individual assets comprised in the estate; as a result HMRC will agree expenditure based on a scale published in HMRC Statement of Practice 2/04. HMRC will accept computations based either on these scales or on the actual expenditure incurred.
When a person acquires an asset from an estate as legatee no chargeable gain accrues to the personal representatives. The legatee is treated as if the personal representatives’ acquisition of the asset had been the legatee's acquisition of it. Therefore the asset is taken as acquired at either the market value at the date of death or, if the asset was acquired subsequent to death, the allowable expenditure incurred by the personal representatives in providing the asset.
When a legatee disposes of an asset which was previously held by the personal representatives to which he became absolutely entitled as legatee, any incidental expenditure incurred by that person or the personal representatives in relation to the transfer of the asset to him is allowable as a deduction in the computation of the gain on disposal.