Tristan Noyes explores some of the lesser-known tax rules applicable on death.
As well as being the two certainties in life, death and taxes often go hand in hand. This article highlights how they interact in certain instances.
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Tax-free uplift
There is no capital gains tax (CGT) on death. Assets owned at the time of death are uplifted to market value, ‘washing out’ any gains generated during one’s lifetime. The executors or personal representatives (PRs), and ultimately the beneficiaries, inherit the asset at the market value ondeath (probate value), meaning only future growth is taxable. This can lead to some interesting opportunities for so-called ‘deathbed’ tax planning.
For example, a married couple own assets jointly, which stand at a large capital gain, and husband is diagnosed with a terminal illness. If wife transfers all her investments to him (a ‘no gain, no loss’ disposal for CGT purposes) and he leaves them all to her in his will, this should wipe out all of the historic gains, and she would receive the assets back with an uplifted base cost.
Loss carry back
Whilst CGT losses can normally only be set against capital gains of the same tax year or carried forward, any losses generated in the tax year of death (while the individual is still alive) can be carried back up to three tax years.
This loss relief could provide a useful tax repayment for the estate.
Shares sold at a loss
The probate value of assets forms the basis for the inheritance tax (IHT) payable by the estate. If the PRs sell assets at less than probate value, they can generally claim a capital loss, which can be offset against other capital gains they make.
Alternatively, if quoted stocks and shares are sold within 12 months of the death, the PRs can instead elect to recalculate the estate’s IHT based on the lower values. This may result in an IHT refund (at up to 40%) rather than saving CGT (at up to 24%).
All shares sold within 12 months of death must be included in the claim, so it is only beneficial if there is an overall loss. The PRs might be able to maximise the relief by carefully timing the sale of shares, bearing in mind the 12-month deadline.
Land and buildings sold at a loss
A similar but slightly different relief applies for real estate sold by the PRs at less than probate value in the four years following death. The claim must include all land sold in the three years post-death (both at a gain and at a loss), but land sold at a profit in the fourth year can be excluded.
This relief has a de minimis threshold – no relief is allowed if the reduction is less than £1,000 or 5% of the probate value.
Note that for both reliefs, there are additional rules if the PRs have purchased or enhanced assets between the date of death and the sale of the asset.
Costs of establishing title
When PRs sell assets, they can claim a deduction for costs, including the cost of establishing, preserving or defending their title. Where professional PRs are used, some of the costs of administering the estate may be claimed against capital gains on assets they sell.
For large or complicated estates, these costs could be material, but it can be difficult to determine the appropriate amount of the costs to allocate to the sold assets. This leads to complexity and uncertainty.
Fortunately, HMRC recognises this, and has published a table of agreed deductions based on the value of the estate. This is laid out in a Statement of Practice and replicated in HMRC’s Capital Gains Manual at CG30570. Where PRs are selling assets, these fixed amounts or percentages can provide additional CGT relief.
Practical tip
If you’re dealing with an estate, do not forget these useful rules, which sometimes get missed. But note that the rules are very prescriptive – for example, the relief for the sale of quoted stocks and shares does not cover other assets (e.g., cryptocurrencies, even though these are similar types of investments).
