When you are the executor on an estate, you have a number of duties and obligations to ensure that the estate is administered correctly.
Capital Gains Tax (CGT) is something that you may be aware of as an individual. However, the rules are different when it comes to dealing with an estate and it is important that you understand the difference. As executor, your principal goal, when it comes to CGT, is to identify if the disposal of an asset within the estate triggers a gain that needs to be reported to HMRC.
Should you fully distribute an estate to the beneficiaries, and it later becomes known that a gain was made and CGT is payable, it would be you as the executor who is held personally liable for settling the CGT. You, therefore, want to make sure that you are fully aware of your obligation, and that you know how to deal with CGT correctly.
When do you need to deal with CGT?
CGT will be triggered when you sell an asset in the estate at a gain from its date of death value. When dealing with estates, it is the date of death value of all assets that are important (not only for CGT but for Inheritance Tax (IHT) purposes, too). This is because for CGT and IHT purposes when someone dies, all their assets are treated as being the current market values are at date of death. This of course means that you do not have to take into account the deceased’s original purchase price/value of the asset. If there has been a gain between the original purchase price/value and the date of death value, the CGT liability which would have been due for this period dies with the deceased. Only a gain made from the date of death to its disposal can incur a CGT liability in an estate.
What is the CGT annual allowance?
The current annual allowance that executors have is currently £12,300 (for the tax year 2021/2022). Executors have this annual allowance for the tax year of the deceased’s date of death, and the following two tax years. It is therefore important to keep track of when you are disposing of assets within an estate, particularly if this is taking place over different tax years. For example, if the deceased passed away in February 2020, the executor would only have until 6 April 2020 to claim the annual allowance of £12,300 for the tax year of the date of death.
You must also be aware that should you not use the annual allowance during the applicable tax year, the allowance is lost (it cannot be carried forward to the next tax year). Should you, for any reason, not deal with the estate of the deceased within the tax year of the date of death or the two subsequent tax years, there will be no annual allowance available (which would mean any gain made would require to be reported).
There are some deductible expenses which can be utilised to reduce the amount of CGT payable, such as estate agency costs and conveyancing costs, stockbroker costs etc. Any deductibles should however be checked with an accountant.
At present if there is a gain over and above the annual allowance, the CGT will be charged at a rate of 28% for properties and 20% for other assets (such as shares).
What can you do to mitigate CGT?
Now that you are aware of CGT, you may be wondering if there are any ways to mitigate CGT? In principle, yes- however when considering these options it would be advisable to discuss them with a solicitor or accountant.
Some of the options which could be used are noted below:
- If there are numerous assets, ensure you are using all of the annual allowances available (i.e. try and sell the assets over the tax year of the date of death, and the 2 subsequent tax years).
- If there are numerous assets, and you are aware that some of the assets will make a loss, ensure you are also selling the assets you expect to make a gain within the same tax year (as you are able to offset your losses against the gains for CGT purposes- however, this still requires to be reported to HMRC)
- Transfer the asset to a beneficiary rather than selling directly from the estate via a Deed of Appropriation. This will mean that the beneficiary(ies) is able to use their own personal CGT allowances. There can be some downsides to this too which should be fully explored with a solicitor before going down this route.
What do you do if CGT is still payable?
Even after taking into account the above, if CGT is going to be payable, as executor you have an obligation to submit a CGT return to HMRC. If you are not comfortable doing this personally, you should instruct an accountant to do this on your behalf. It is important to note that since 6 April 2020, any CGT arising from the sale of a property must be reported to HMRC within 30 days of the completion of the sale. It is therefore advisable to have consulted your accountant before the sale completes.
If you are the executor of an estate and require assistance, we have an extensive bereavement team who are able to support you during this time. Please contact us on 0330 175 1234 and ask to speak to the bereavement department.
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