RegulationOct 28 2013

Personal representatives and CGT

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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.

Planning opportunities

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.

Using examples to mitigate CGT

Dennis died in May 2013 with shares valued at £100,000 on that date. The shares will be passed to his daughter, Mary, who intends to sell them in order to pay off her mortgage.

In October 2013 the personal representatives are in a position to pass the shares to Mary. Due to market gains since the date of death the shareholding has increased in value to £120,000.

The personal representatives sell half the holding to realise a gain of £10,000, which falls within their annual exemption. They pass £60,000 cash plus the remaining shares to Mary. She then sells the shares, also realising a gain of £10,000 which falls within her own annual exemption.

Utilising the annual exemptions of both the personal representatives and Mary has maximised the cash available to Mary.

Bed and breakfasting

CGT planning must avoid the bed and breakfast rules. Bed and breakfasting involves selling shares and buying them back shortly afterwards in order to reduce CGT bills. Since 17 March 1998, these contrived sales no longer have the desired tax consequences.

For CGT purposes, any shares sold and repurchased within a 30-day period will be matched, so that the gain or loss which would otherwise have arisen does not occur. These 1998 rules apply to taxpayers who dispose of shares and then acquire shares of the same class in the same company within 30 days of the disposal.

Exiting the market

As long as the assets are sufficiently divisible, the personal representatives may come out of the market for 30 days, making sure only to encash enough each year so that the gain, after any reliefs available, falls within the annual exemption.

Purchase similar shares

The immediate acquisition of shares in the same sector of the market provides some insurance against unwanted rises in price, as the parallel shares should broadly move in the same way as those to be repurchased.

Personal representatives and beneficiaries

The same person has different legal identity as personal representative and beneficiary. Both annual exemptions can therefore be used in the same tax year. These can also be used on different assets to maximise tax-efficiency.

Gain more tax-planning ideas

There may be opportunities to add value both pre- and post-death tax planning linked to gains.

Relief for ‘loss of value’ may be available if either shares (quoted shares and securities only) are sold within a year of death; or property (land, building or lease) is sold within four years of death. The relief allows the sale price to be substituted for the value on death for the purposes of (re)calculating the IHT on death.

For example, Kate, a widow, died in January 2012. Her house was valued for probate at £800,000. In July 2013, Kate’s executors sold the house at arm’s length to a complete stranger for £700,000. The executors claimed relief under section 191(1) IHTA 1984. The value of the house at the date of death for IHT purposes was reduced to £700,000. By this action the estate saved IHT of [£800,000 - £700,000] x 0.4 = £40,000.

In both cases there must be an overall loss on the sale of the qualifying assets. This means that relief is only available if the gross sale proceeds of all shares or property sold within the time limit is less than the value at the date of death.

The assets must be sold and relief claimed by the person who is liable for the IHT. This will usually be the personal representatives or trustees (not the beneficiary).

These reliefs are more likely to apply to second deaths, ie where the inter-spouse exemption does not apply. It is, of course, advisable to ensure that the IHT saving is greater than the costs involved (including loss of paying by instalments in the case of property).

Lifetime gifting of assets that are likely to carry greater growth prospects gives greater potential for tax savings; even if the gift fails, the original gift rather than current value is counted back in to the taxable estate. Furthermore, reduced capital gains are likely to make the ‘incur CGT now to save IHT’ trade-off more palatable.

Victoria Harman is technical support consultant at Hargreaves Landsdown