It is generally assumed capital gains tax (CGT) is replaced by inheritance tax (IHT) on death. However under certain circumstances it still may be charged.
Gains already realised by the individual in the tax year that death occurred will be subject to CGT assuming the profits are in excess of the CGT allowance (£10,900 for tax year 2013/14). These gains are declared by the personal representatives through a self-assessment tax return completed as part of the estate administration process. Losses made by the individual in the year of death can be carried back a maximum of three years and offset against any CGT paid by the individual.
Asset acquisition cost rebased on death
When a person dies leaving assets that will be passed to their beneficiaries under the terms of a will or intestacy, there is no immediate CGT charge. The assets are passed from the deceased’s estate to the personal representatives at their market value on the date of death. So on death, the CGT is ‘washed out’ and the acquisition cost rebased – essentially CGT is replaced by IHT.
When the administration of the estate has been completed and the remaining assets are distributed to the beneficiaries, again they are passed at the market value at the date of death. The beneficiaries are not immediately liable for CGT on acquiring the assets.
However, if there have been gains on the assets since the date of death, the beneficiaries will also inherit the gains, and so will be liable to CGT on eventual encashment, assuming the gains are in excess of the CGT allowance. This also applies to losses and any loss from the date of death is carried over to the beneficiary.
CGT liability for the period of administration
During the period of administration, the personal representatives may be liable to CGT if they sell or dispose of any of the assets. Until the residue of the estate has been determined, if a gain arises while the personal representatives hold the assets, that gain is chargeable to the personal representatives rather than the beneficiaries.
Personal representatives are treated similarly to individuals for CGT purposes. The full annual exemption is available: from the period of death to the following 5 April and for the two full tax years following. Personal representatives are charged CGT at 28 per cent, although this should not be relevant as the point of the planning is to ensure the gain is less than the annual exemption on disposal, thereby avoiding a tax bill.
If the personal represent-atives realise a loss, this can be offset against gains the personal representative makes, but cannot be carried over to the beneficiary.
Clearly the beneficiaries want to inherit the assets as tax-efficiently as possible. Therefore the personal representatives may be well advised to use their annual exemption(s) to mitigate the eventual CGT. Such planning to rebase the acquisition cost can take a form similar to annual CGT planning done by individuals. An example is shown below.