You’re looking after the estate of your late mother and need to sell assets that were left to you to raise cash to settle inheritance tax and other debts. Will you have to pay capital gains tax on the proceeds?
Administering an estate
The role of an executor (personal representative) is rarely straightforward and is always time consuming. One problem which crops up from time to time is determining what the tax consequences are if executors sell assets during the administration of the estate.
Trap. If you take on the role of executor and want to sell an asset which was specifically left to a beneficiary, you may not be able to unless there is no alternative, i.e. because it’s the only way the estate can raise cash to pay debts owed by the deceased. Even then you should first consult the beneficiary and check the position with a lawyer.
Tax and executors
As an executor you become the temporary owner of all the assets in the deceased’s estate (except assets they owned as joint beneficial owners with someone else; these pass automatically to the other joint owner). The assets are yours until they can be passed to the beneficiaries. This means (with one exception explained below) that you are liable for any tax on capital gains made from the sale of estate assets.
Trap. You’re also responsible for reporting the transaction to HMRC. This requires the completion of a tax return.
Note. If you’re about to pass an asset to the beneficiary entitled to it and they instruct you to sell it and give them the cash instead, then they must report the capital gain on their tax return and pay any tax due.
How much tax?
The normal capital gains tax (CGT) rules apply for working out gains, i.e. the gain is the amount by which the sale proceeds exceed the asset’s cost. Note that the cost of an asset to an executor (or beneficiary) is its probate value.
Tip. Executors get the same annual CGT exemption as individuals (£6,000 for 2023/24) for the tax year in which the deceased died and the next two years. Remember this when selling more than one asset; don’t make all the sales at once and end up with a CGT bill if it can be avoided by leaving one or more sales until the following year when you get another annual exemption.
Tip. If you need to sell a number of assets some of which will produce gains and others losses, plan the sales so that the losses are used to best effect. That is, as far as possible, don’t sell loss-making assets in the same tax year as assets producing gains if the gains are covered by the annual or other exemption. Make the loss-making sales in a different year where gains are not covered by an exemption.
And finally. If you’re selling a physical item such as an antique there’s a special exemption which might apply to any capital gain.
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.