Could Capital Gains Tax be Due on Your Estate?

In conversations about tax and estates, its typical to focus on inheritance tax. However, in some situations, beneficiaries might need to consider the question of capital gains tax and whether it could be relevant to the estate they’re responsible for winding up.

What is capital gains tax?

Put simply, capital gains tax (CGT) is a tax levied against any profit that comes from selling an item that has risen in value since it was purchased.

Chargeable assets for capital gains tax include:

Personal possessions worth £6,000 or more.
Property that is not your main home. (In some cases, you might have to pay CGT on your main home, but only if it’s very large, has been used for business, or you have let it out to tenants).
Shares.
Business assets.
Cryptoassets.

When a chargeable item is sold, you will need to pay capital gains tax on any profit. For example, if you were to buy a piece of art at a cost of £10,000 and later sold it for £15,000, your £5,000 profit would be subject to capital gains tax.

Capital gains tax usually needs to be paid unless the following exemptions apply:

Any profit an individual has earned remains below their individual £3,000 annual capital gains tax allowance.
The item was sold or given to a spouse.
The item was given to charity.

It’s important for personal representatives to note that the annual £3,000 exemption is only available to an estate for the tax year in which the death took place and for the two tax years following. After this, the estate will have no annual exemption for capital gains at all.

Are estates exempt from capital gains tax?

Unlike inheritance tax, capital gains tax does not automatically come due on an individual’s estate at the time of their death. The rationale here is that it should not be necessary to pay tax twice on the same assets.

Because of this, there is a capital gains tax death uplift that helps to avoid the possibility of the same assets being double taxed. Essentially, the uplift functions to reset the count on the value of any assets owned by an estate.

Thanks to the uplift, on an individual’s death, the ‘base’ value of their assets by which CGT would usually be levied (i.e. the value of the assets when they were originally purchased) is replaced by the value of the asset at the time of their death. Therefore, if they are then sold according to that value, there is no ‘profit’ to be taxed.

Essentially, this means that capital gains tax will only come due on assets owned by an estate if they rise in value between the death of their owner and the date at which they are sold, regardless of how much they may have increased in value since they were purchased.

Why might capital gains tax be due on your estate?

Problems can arise to do with capital gains tax if the personal representatives of an estate have undervalued assets in an attempt to reduce the inheritance tax burden of the estate. Though this may appear to be effective in terms of inheritance tax, it can result in assets appearing to have increased in value when they are sold, and capital gains tax therefore coming due.

Even when assets have been valued fairly at the time of death, it’s perfectly possible for them to increase in value by the time they are sold. This could be the case if the estate is a complex one that requires a great deal of untangling before any assets can be disposed of or distributed. This could also be the case if the estate is contentious and any resulting legal processes takes a number of years to complete.

CGT will not be due on any assets that are transferred directly to beneficiaries. However, if the beneficiaries go on to sell those assets at a later date, CGT will be payable on any profit they make above and beyond the value of the asset at the date of death of the previous owner. (Unless, of course, any other exemptions apply).

Taking allowable losses into account

If you are responsible for an estate that may be subject to capital gains tax, it’s really important to look at the estate and its liability as a whole, rather than to just consider individual asset sales. This is because, in addition to the annual CGT allowance of £3,000, personal representatives can also count negative profits against any possible CGT liability. In other words, if an asset has been sold on behalf of an estate for significantly less than its value at the death of the owner of the estate, the negative difference can be used to cancel out any other profits.

For example, if a holiday apartment owned by the estate was valued at £200,000 at the time of death but later sold for £180,000, this represents an allowable loss of £20,000. If some shares owned by the estate went up in value by £20,000 between the date of death and the time that they were sold, this profit could be cancelled out by the previous allowable loss, as long as both sales took place in the same financial year.

When will any capital gains tax due on your estate need to be paid?

If any capital gains tax is due on assets that have been sold by the estate, when the tax will need to be paid by will depend on the asset in question.

If the asset is a property – and private residence relief doesn’t apply – then any capital gains tax that is due on the sale will need to be paid within 60 days of the sale completing.

Capital gains tax on any other assets must be reported by the 31st December following the end of the tax year in which the gain was made. The associated tax must be paid by the 31st January.

If you are paying this on behalf of an estate, the way in which you will need to pay the tax on any non-property related gains will be different than if you were paying the tax on your own behalf.

Personal representatives cannot use the government’s real time capital gains service on behalf of an estate. Rather, they will need to report gains in either of two ways:

1. By reporting them through a trust and estate self-assessment return (SA900).

2. By reporting them by writing directly to HMRC. This is referred to as their ‘informal procedures’ for simple estates. This option will only be available to personal representatives who are acting on behalf of an estate that was valued at less than £2.5 million at the time of death, the total tax due is less than £10,000, and the total value of any assets sold by the estate in any one tax year is less than £500,000.

Once you have reported the gains to HMRC, they will contact you with details of how to pay.

Is there anything you can do to prepare for the possibility of capital gains tax on an estate?

If you’re responsible for administering an estate, one of the most important things you can do to protect against any potential capital gains tax bills is to ensure that all assets have been properly valued at the time of death.

It will also be very beneficial to ensure you have kept detailed records of all valuations, sales, profits and losses. This will enable you to be able to look at the whole picture and time the sale of assets to ensure you take full advantage of annual allowances and any allowable losses to reduce the overall CGT bill.

Who can offer you support?

Administering an estate after a death can be daunting with or without the possibility of there being capital gains tax to pay. If you’re unsure of how to navigate the process and any potential tax – please do be assured that help is available.

Our specialist probate solicitors can help you to ensure that you have met all your legal and financial responsibilities regarding the estate. Why not get in touch to find out how we could support you?

FAQs

Is capital gains tax likely to be due on your estate?

Unlike inheritance tax, capital gains tax will not come due automatically on an estate after a death. The capital gains tax death uplift means that most assets will not be subject to capital gains tax when they are sold by personal representatives or beneficiaries. The only exception to this can be if the asset has increased in value between the time of death and when the asset is sold. 

What is the capital gains tax death uplift?

When an asset is sold, whether or not capital gains tax will come due depends on how much profit is made on the sale versus the original purchase price. However, when someone dies, all the assets that make up their estate are subject to the death ‘uplift’. This means that the base value of each asset (i.e. the amount the asset was purchased for) is reset and replaced with the value of the asset at the time of death. 

What can you do to manage the amount of capital gains tax that might be due on your estate?

If you are responsible for managing an asset, you will likely want to take steps to reduce any tax liability due the estate. You can manage how much CGT is likely to be due on an estate in two ways. Firstly, by ensuring that all assets are properly valued after the death, as this will enable you to take advantage of the CGT death uplift. Secondly, it’s important to ensure you keep careful records about any and all sales of assets belonging to the estate, as any assets that are sold for less than their value at the time of death could help to offset any assets that are sold for more. 

When will any capital gains tax due on an estate need to be paid?

If any capital gains tax is due on the sale of assets by an estate, when that tax will come due will depend on the type of asset that is sold. If a property that is sold (and that property is not eligible for private residence relief) the capital gains tax will need to be paid within sixty days. Gains on other assets will need to be paid by the 31st January following the end of the tax year in which the gain was made.