On death, all assets owned by the deceased are re-valued to their market value yet no disposal is deemed to have occurred and thus no capital gains tax liability arises. The beneficiaries under the deceased’s will are deemed to inherit the assets at their market values at the date of death.
Example 1
Henry Smith owned a valuable vase which he had bought some years ago for £7,000. On his death the vase was worth £16,000.
He left the vase to his son, Arthur, who a few months later sold the vase for £17,000.
No capital gains tax liability arises on Henry’s death and on the sale Arthur’s capital gain is only £1,000.
The effect of Henry’s death is the avoidance of capital gains tax on the vase’s appreciation from the date he bought the vase to the date of his death.
Executors’ v Beneficiaries’ Sales
Following death, title to assets owned by the deceased passes to the executors of the will; in other words, title to the assets does not pass directly to the beneficiaries named in the will. The executors are under no legal obligation to distribute the deceased’s assets within one year of death; this may mean that the values of assets at the date of death move quite significantly over this time.
With respect to the sale of any assets in the deceased’s estate, either the executors may effect the sale or the executors could choose to assent (i.e. distribute) the assets to the beneficiaries and let the beneficiaries sell.
Example 2
Mary Blossom, a widow, died in December 2009 (i.e. the tax year 2009/10) leaving her house equally to her four children.
The house was worth £600,000 on her death. Once the executors had settled the inheritance tax liability arising on Mary’s estate and paid off all her debts it was some twenty months after her death, by which time the house was worth £675,000.
Should the executors effect the sale or assent to the beneficiaries?
Executors (irrespective of their number) are entitled to only one annual capital gains tax exemption (currently £10,100 for the tax year 2009/10); indeed, this entitlement only extends to the tax year of death and the two immediately following tax years after which no annual exemption is available to the executors.
A sale of the asset by the four children (in Example 2 above), however, gives rise to four such annual exemptions. A comparison of the two options reveals the following:
Example 2 Continued
Option 1 - Executors sell the house for £675,000 precipitating a capital gains tax liability of 18% of [£75,000 less the annual exemption of £10,100] i.e. £11,682.
Option 2 - Executors assent the house to the four children who then sell the house for £675,000.
Each child has a capital gains tax liability of 18% of [[[£675,000 - £600,000]\4] less £10,100] i.e. £1,557.
Comparing the aggregate capital gains tax liabilities shows £11,682 as against £6,228.
Capital Losses
It may, on the other hand, be that the asset’s value drops after death compared to its value at the date of death precipitating a capital loss on sale. Whether the executors or beneficiaries should effect the sale will depend upon who is able to utilise the loss most effectively (as a general rule, the beneficiaries).
Practical Tip
Beneficiaries should liaise closely with executors early in the administration of the deceased’s estate to ensure that any tax planning options are actively considered.
Malcolm Finney
