Your father died a year ago. His estate includes quoted shares and his old home. You and the other beneficiaries want your inheritance in cash rather than as a share of the assets. How can you minimise the tax triggered by the sale of the assets?
Tax and administrating an estate
As a personal representative (PR), e.g. an executor, or a residual beneficiary of an estate, tax is an especially important issue that you need to understand. It’s not only inheritance tax (IHT) you need to think about but also income tax and capital gains tax (CGT). Unlike IHT, income tax and CGT don’t apply to the value of the assets owned by the deceased at the time of their death but are payable on any income or capital gains arising during the period of administration of the estate.
PR’s tax liability
As a PR of an estate you’re legally liable for any tax due on income and gains that arise during the administration. You must work out how much is payable and deduct it from the monies you pass to the beneficiaries who share in the residue of the estate. The tax you withhold must be paid to HMRC either through self-assessment or by an informal arrangement.
Power tip. You can report income, gains and the tax due using the informal method if the net estate is worth no more than £2.5 million and the total tax payable doesn’t exceed £10,000.
Trap. Calculating the income tax payable is relatively straightforward but CGT can be more tricky and contains a sneaky trap.
Capital gains – reporting and taxing
The basic rules for working out CGT on gains made from the sale of estate assets are:
- it applies to the same types of asset which are within the scope of CGT for individuals
- gains or losses arise on the difference between the value of an asset at the deceased’s date of death when an asset is sold
- the PR is entitled to the usual CGT annual exemption (£3,000 for 2024/25 and 2025/26) when working out the gains made in the year of death and each of the following two tax years
- gains made from the sale of a residential property must, as usual, be reported to HMRC within 60 days of completion of the sale but the tax is not payable until HMRC sends a demand.
Timing is important for CGT
The CGT payable on assets in the estate can be affected by the timing of their sale. If assets are sold during the period of administration, the PR is entitled to deduct the annual exemption when working out the gain.
Power tip. By transferring assets to the residual beneficiaries after the estate has been administered any gain is taxable on them and not the PR. Beneficiaries can deduct their exemptions and capital losses when working out the CGT payable. A lower tax rate can also apply.
Example. John died in May 2023 leaving the whole of his estate in equal shares to his four adult children. The estate included assets within the scope of CGT: shares worth £250,000 at the time of John’s death and his home worth £600,000. These assets are now worth £266,000 and £660,000 respectively. If the PR sells the assets during the period of administration the CGT payable is £17,520, but if the sales are made by the beneficiaries the CGT is just £9,720.
Personal representatives (PRs) of an estate are liable to tax on gains made from the sale of assets during the period of administration. However, by transferring the assets to the beneficiaries to sell they and not the PRs are liable. As the beneficiaries can use their capital gains tax exemptions and reliefs against the gains, this can substantially reduce the tax payable.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.