The following guide looks at how capital gains tax on inherited property applies, including how to calculate gains made by the executors or personal representatives, or those who inherit property from the deceased.
Capital gains tax for executors and personal representatives
As a general rule, when someone dies there is no capital gains tax (CGT) charge. That said, special rules apply in relation to how assets are to be treated during the period of administration.
This is the period during which the executors or personal representatives are settling the estate. It starts on the day following the date of death of the deceased and ends when all necessary steps have been taken to complete the administration of the estate.
Broadly speaking, assets that were owned by the deceased are initially treated as though they had passed to the executors or personal representatives at the date of death.
As such, if any property is sold or disposed of by the executors or personal representatives during the period of administration, and the value of that property has appreciated in value since the date of death, a CGT liability may arise – although this will be paid out of the estate.
However, the distribution of an asset to a beneficiary will not be treated as a ‘disposal’ for the purposes of determining capital gains tax on inherited property.
When the administration of the estate has been completed and the assets remaining in the estate are distributed under the provisions of any will or the rules of intestacy, no capital gains tax is charged.
Instead, the assets are treated as though they had passed to the beneficiaries at the date of death, at their market value on that date.
The residence status of the deceased
Broadly speaking, only UK tax residents are liable to capital gains tax. The knock-on effect is that the executors or personal representatives of a deceased are treated as having the same residence and domicile status as the deceased.
As such, if the deceased was non-UK resident prior to their death, the executors or personal representatives will not be liable on any disposals even if they are themselves resident in the UK.
In circumstances where, despite being not resident in the UK for tax purposes, the deceased would still have been liable to capital gains tax on the disposal of a particular asset, then the executors and personal representatives will also be liable on any disposal of that asset.
There may also be a liability to capital gains tax on inherited property for the periods up to the date of death where the deceased had recently disposed of assets, but had not yet submitted a return.
Capital gains tax on inherited property for beneficiaries
When you inherit an asset, typically inheritance tax will be paid out of the estate of the person who has died.
Inheritance tax becomes payable in the event that the value of the estate, after any expenses and debts have been paid, exceeds the relevant nil rate band for the tax year in which the deceased passed away.
However, as a beneficiary, you will still be liable to any capital gains tax where:
- you subsequently dispose of the asset(s) bequeathed to you, and
- those assets have appreciated in value between the date of acquisition and the date of disposal.
Variation of the terms of the will or intestacy
A deed of variation can be used to change the way in which an estate is distributed. In other words, an individual beneficiary can redirect their inheritance to another person.
Where the document is legally valid, and if certain conditions are met, then the variation will be treated for CGT purposes as not being a disposal for which any capital gains tax liability will arise.
However, the deed of variation must be executed within two years of the deceased’s death and must contain a clear statement to the effect that the relevant legislative provisions apply.
Calculating capital gains tax on inherited property
When calculating capital gains tax on inherited property, the chargeable gain is the difference between the value of the asset at the date it was inherited and the value of the asset at the date of disposal or, alternatively, the proceeds of sale.
Typically, the market value of an asset will be ascertained for inheritance tax purposes. This is often referred to as the ‘probate value’.
In such cases, capital gains tax on inherited property on future disposals by executors or personal representatives, or by beneficiaries, will be calculated on the basis that their acquisition cost is the probate value.
In addition, the market value of an asset may need to be considered at the date of disposal, where the asset has been transferred or given away. This is defined as “… the price which assets might reasonably be expected to fetch on a sale in the open market”.
However, you do not need to calculate any chargeable gain on the sale or disposal of an asset where the sale proceeds or market value do not exceed £6,000.
Where the disposal proceeds exceed £6,000, the amount of capital gains tax payable will depend on a number of factors, not least the extent of the chargeable gain and the applicable CGT rate.
Rates of capital gains tax on inherited property
The rate of capital gains tax on inherited property can differ depending on the taxable income of the beneficiary, as well as the nature of the asset disposed of.
To determine the applicable rate, ie; the standard or the higher rate, you will need to add any net gains to your total taxable income.
For assets other than residential property, where the two figures combined are below the basic rate threshold, the standard rate of capital gains tax is set at 10%. The higher rate of 20% is charged on anything exceeding this threshold.
For residential property, the standard rate of capital gains tax is 18%, with a higher rate of 28%.
Tax-free allowance for capital gains tax on inherited property
As an individual, you are only liable to pay CGT on any gains that exceed the tax-free allowance for that year. This is known as your ‘Annual Exempt Amount.’
This means that you will not be liable to pay tax on any increase in value on an asset(s) if all your gains in one year fall below this threshold.
Every beneficiary who is bequeathed property will benefit from a tax-free allowance, if and when s/he subsequently sells or otherwise disposes of this property.
For the tax year 2020/21 the AEA is set at £12,300. This tax-free allowance also applies to executors or personal representatives of a deceased’s estate, as well as trustees of disabled people. The allowance for other trustees is set at £6,150.
The executors or personal representatives will be entitled to the full annual exempt amount for capital gains tax on inherited property for the tax year in which the death occurred and the following two tax years.
There is no entitlement to the AEA if the administration period lasts longer than this.
Key takeaway for capital gains tax on inherited property
The rules relating to capital gains tax on inherited property can be especially complex, not least when ascertaining the market value of a disposal.
Advice should always be sought from a specialist in probate, tax and wills.
The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.
Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.
Before acting on any of the information contained herein, expert legal or other advice should be sought.