Income and Capital Gains Tax and Estates – A Short Reminder

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A recent report commissioned by the Government has recommended that the Chancellor overhauls Capital Gains Tax for individuals and what this will bring is the subject of much speculation. Whilst most people are aware of the current personal rules surrounding Income Tax and Capital Gains Tax (whether in passing or in depth), thought is not often given to the fact that these taxes also apply during the administration of an estate.

At the date of death, the assets of the deceased are revalued and any capital gains which have accrued during their lifetime are wiped out as the assets become subject to Inheritance Tax. This is good news for Capital Gains Tax as this will mean that the acquisition cost for the post-death sale of any assets will be based not on the value which the deceased originally obtained them, but the revised uplifted value at the date of their death.

During the estate administration process, any asset which is sold at more than probate value will be potentially liable to Capital Gains Tax in the hands of the Executors. After death, the Personal Representatives of the estate have what are known as the “executors’ years”, being the tax year from the date of death to next 5th April and the two tax years thereafter (so if the deceased died on 1 January 2020, the executors’ years would be 2 January 2020 – 5 April 2020, and tax years 2020/2021 and 2021/2022). During each of these tax periods, the Personal Representatives have an annual exemption equal to that of an individual to offset against any gains the estate has crystallised.

If the gains exceed this annual amount (or if the estate carries on long enough that the estate allowance disappears in the fourth tax year of administration) then the Personal Representatives will have to pay Capital Gains at the highest rates, which are currently: –

  • 28% on residential property; and
  • 20% on all other assets.

If it appears that a Capital Gains Tax liability is going to arise, the Personal Representatives would be well advised to look into the possibilities of transferring some or part of the gain to the beneficiaries in the process known as “appropriation”. This allows them to transfer some of the liability to beneficiaries so that the beneficiaries’ personal allowances can be used as well that of the estate, thus increasing the total amount of gain which will pass tax free.

Each year, the estate is also subject to Income Tax on any income received. Unlike an individual, the estate has no tax free allowance and so all income received is taxed at the following rates: –

  • 5% on dividend; and
  • 20% on all other income.

The Personal Representatives will need to pay any tax due on income received to HMRC and where appropriate, issue a tax deduction certificate to the beneficiaries who will need to include any income paid to them on their own tax returns, although they will receive a tax credit for the tax already paid by the estate.

Because of the need to keep track of these taxes, Personal Representatives should seek appropriate advice on this and where the estate is being administered with the assistance of professionals, they should ensure that the correct paperwork has been completed on their behalf.

Here to Help

If you would like advice on Capital Gains Tax or other private affairs, please contact Alastair Liddiard, Senior Solicitor specialising in Wills, Trusts, Probate and Powers of Attorney.

Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.