If the estate assets rise in value between the date of death and the date they are transferred to beneficiaries or the date they are cashed or, if they produce income, the personal representatives and the estate must account to the Revenue for any chargeable income and capital gains tax.
Capital Gains Tax
Personal representatives are entitled to the deceased’s personal capital gains tax exemption limit in the tax year in which death takes place and in the two tax years which follow death. Assets which have a large capital gain should therefore usually be dealt with by transfer to beneficiaries or sale within three years if death, if possible, although careful consideration of the amount of the gain with which each asset is pregnant, and the spacing of sales over the three tax years can prove advantageous.
When deciding whether to sell assets or transfer them to the beneficiaries and let the beneficiary sell them, the personal representative should take into account the beneficiary’s views and capital gains tax position and the current capital gains tax rates for individuals and for personal representatives, with a view to acting in the way which will prove to be more favourable.
The personal representative’s capital gains tax exemption and that of the beneficiary are independent of each other; careful use of both of them can achieve considerable tax savings if the gains since death are large.
Losses which occur in the year of death can be carried back for capital gains tax purposes and used to reduce gains which occurred in the three years which preceded death.
When personal representatives or beneficiaries sell or dispose of assets inherited from an estate then for capital gains tax purposes when calculating the gain, they are allowed to add to the base cost (that is, the cost at which they are deemed to have acquired the relevant asset), a proportion of the legal and other expenses involved in preparing the Inland Revenue account and obtaining the grant of probate.
Because it is difficult to ascertain exactly how much of the total expense relates to any particular asset a scale (known as ‘The Richards Scale’) is usually accepted. The scale used for deaths which take place after 5th of April 1993 is:
Gross value of the estate for IHT purposes: Sum Allowed:
(a) Up to £40,000 1.75% of the probate value of the asset
(b) £40,001 – £70,000 £700 divided proportionately between the estate assets according to probate values
(c) £70,001 – £300,000 1% of the probate value of the asset
(d) £300,001 – £400,000 £3,000 divided proportionately between estate assets according to their probate values
(e) £400,001 – £750,000 0.75% of the probate value of the asset
Also bear in mind that if an asset is re-valued for IHT purposes to reflect a fall in value between the date of death and the date it is transferred to the beneficiary or sold, then for capital gains tax purposes the reduced value becomes the base cost value (that is, the value at which the asset is deemed to have been acquired by the personal representatives or the beneficiary) and before deciding to elect for an inheritance tax revaluation, check whether inheritance tax and capital gains tax are at the same rates at the relevant time.