CGT on death
CGT on death – basic principle
Of course, death is a fairly grey cloud with few silver linings. However, a tax obsessive might say differently. From a tax perspective, death results in any capital gains evaporating.
However, before you get too excited, this rule essentially exists to prevent the same capital assets suffering an inheritance tax (“IHT”) charge and a CGT charge on death.
Where someone inherits an asset from a deceased persons estate then they will acquire this at the value of the asset at the date of probate. Again, there is no CGT at this time.
CGT on death – exceptions to basic rule
One needs to be slightly careful where assets are held within a trust.
Generally, a trust will onlybenefit under the basic rule above where the trust is a qualifyinginterest in possession (IIP). This trust must be subject to a life interest and the life tenant is the deceased.
Why so? Well, it is the corollary of the fact that the value of this trust interest will remain within the deceased’s estate for IHT purposes.
This rule will have increasingly less relevance as the years go by as only trusts created before 22 March 2006 will be qualifying IIP’s.
One exception (to this exception) is where a gain was deferred on the transfer of the asset to the trust. For example, it is quite common for holdover relief to be claimed when an asset is transferred. On death, these gains will rise like Lazarus and become taxable.
CGT on death – prior gain deferred under holdover or rollover reliefs
The implications for holdover relief and IIP trusts is mentioned above. However, what about an individual who has deferred a gain under either holdover or rollover reliefs.
Fortunately, such gains do not revive (unlike in the situation for trusts above) and remain free of CGT on death. Again, the beneficiary of the asset will be deemed to acquire this at the probate value of the asset.
CGT on death & capital losses
Capital losses that crystallise in the year of death can be carried back and utilised against gains that have arisen in the prior 3 tax years. Losses are offset against the most recent years first.
CGT on death & deeds of variation
It is possible to vary a deceased person’s will within 2 years of death by entering in to a deed of variations. This might be to provide an alternative beneficiary with an inheritance for various reasons, including for tax purposes.
Technically, such a variation is a disposal for CGT purposes. However, where the deed of variation is executed property then there should be no CGT a clause needs to be included in the deed to ensure that the variation is not a disposal for CGT purposes. The deed of variation should ensure that TCGA 1992, s62(6)applies. The practical effect of this is that it allows the variation to be ‘read back’ into the will for CGT purposes. As such, the general rules discussed above will apply to the assets and beneficiary.
CGT on death & asset values
What value should be taken in to account for CGT on death?
There is a key point of distinction and it depends on whether the value has been:
- Ascertained by HMRC for IHT purposes; or
- Has not been ascertained by HMRC for IHT purposes
The word ‘ascertained’ means that the specialist HMRC Trusts and Estates team have used this valuation to arrive at a final charge to IHT and the amount of the IHT liability was dependent on the valuation used.
Under the first limb, the value that has been ascribed to the asset for IHT purposes will be accepted by HMRC and will be used as the base cost for CGT purposes at such time the asset is sold or otherwise disposed of.
Under the second limb, where the value has not been “ascertained”, then the value that has been used on the face of the IHT return will not necessarily be accepted by HMRC for CGT purposes.
CGT on death – conclusion
As stated above, the general rule for CGT on death is that there will be two main consequences:
- There is a deemed disposal for CGT purposes on death but that gain is not subject to tax; and
- The beneficiary is deemed to acquire this asset at probate value
However, as with most tax provisions, there are exceptions to these general propositions.
If you or your client have any queries regarding the CGT on death or any other CGT matters then please get in touch.