Capital Gains Tax on sales after death
One of the first questions that the HMRC might raise when dealing with an estate on which Inheritance Tax is payable, is whether the party is planning to sell the chattels. If the answer is yes, then the HMRC will request that the gross sale proceeds are substituted for the probate valuation once the sale takes place.
It could be that the chattels are heirlooms or legacies with special significance to certain family members, so a hasty disposal is not recommended. It is best to make the decisions to sell certain items once the administration of the estate is complete and the IHT is settled.
The valuation done for the s160 will serve as basis for the value of the asset where Capital Gains Tax applies. For CGT, sale expenses are deducted with an additional deduction of a part of the costs of extracting probate, where sold by the executors (but not the beneficiaries). The HMRC also provides a scale in the Statement of Practice 2/04: as an example, if an estate is valued between £500,000 and £1,000,000 the deduction is 0.8% of the probate value. The VAT at the prevailing rate can also be added on to that. If the costs of establishing title by the executors were above normal, then representations for higher deductions can be made. The costs associated with probate valuation can also be claimed on CGT deductions.
Capital Gains Taxes on chattel sales
The CGT laws state that the disposal of tangible moveable assets is completely exempt from CGT provided that these items are valued at £6,000 or less. The limit applies to values of the gross sale proceeds. A lifetime gift of chattel is a disposal for CGT purposes. If the disposal proceeds exceed £6,000 the figure produced after IHT and commission charge is the chargeable gain. There will also be an annual allowance for CGT as well.
The sale of a set of chattels by a tax payer can be treated for CGT as the disposal of a single item i.e. with only one £6,000 allocated, this will also depend on who the item goes to. In regards to what can be considered a single “set”. The HMRC views a number of articles to form a set when they are essentially similar and complementary. Also, their total value should be higher when sold together rather than sold separately.
Wasting Assets, or items with a lifetime of less than 50 years, e.g. plant machinery, are exempt from CGT. In the case of plant machinery this is regardless of whether their actual lifespan proves to be over 50 years.
Special rules apply when the wasting assets are used as part of a business. The HMRC would consider an antique clock as machinery and thus a wasting asset exempt from CGT.
It must be mentioned that these CGT rules may not apply to traders of assets. In some cases a single sale could be considered as a trading activity. As an example, buying a single small item and then selling it fully catalogued at a higher price would be considered a trading activity.
Deeds of variation and appropriations
For executors and their advisers, it is worth considering the CGT implications before the sale or disposal of any item of the estate. CGT disposal takes place upon the unconditional terms of the contract between the parties, and not on the actual completion of the sale. It is entirely possible for the entitled beneficiary and not the executor to appropriate and sell the asset themselves. The decision falls upon the beneficiary and their circumstances, for example the beneficiary might be non-UK resident for CGT purposes. This is of course provided that the estate is properly settled and there are no outstanding debts or liabilities on it.
Sometimes, the beneficiary may wish to gift part or all of the sales proceeds from an asset. If that is the case, a ‘deed of variation’ can be used to do so. This is useful in order to make savings on tax.
In order for the deed to be valid for IHT and CGT purposes, it must be done within two years of the person’s death and it must contain the appropriate IHT and CGT elections (sections 142 IHTA 1984 and 62 TCGA 1992). A suitable appropriation needs to follow the execution of the deed. You can include more individual sellers to increase annual CGT allowances. The executor may also retain ownership of a part of the asset so that can continue to use their annual CGT allowance.