Example - Tax-free uplift on death
George dies and his estate
includes shares in ABC Ltd, a buy to let property and a valuable antique print.
He had purchased the shares and buy-to-let some years ago for £3,000 and
£60,000, which on his death were worth £7,000 and £90,000 respectively. The
antique print had been inherited from his uncle ten years earlier who had
originally paid £1,000 for the print, which at his death was worth £3,500 and
at George’s death was worth £5,600.
George left the shares to
his daughter Emily; the buy-to-let to his two brothers, Brian and Bob; and the
antique print to his son Matthew.
Had George sold the assets
prior to his death (e.g. the day before) he would have had a CGT charge on
gains of £36,100 (i.e. £4,000, £30,000 and £2,100). After the annual exempt
amount of £11,100, £25,000 would have been chargeable at, say, 28% producing a
charge of £7,000.
If instead, George had
decided to hold on to the assets and leave them in his will, as above, no CGT
charge would have arisen on his death, saving £7,000.
Dying owning assets that have increased in value since acquisition is an effective way of avoiding CGT!
In the above example, it might also be observed that not only did George avoid a CGT charge on the antique print, so had his uncle on his death. Thus, leaving, say, valuable family heirlooms by will is CGT effective (but unfortunately may be subject to IHT).
Capital gains tax versus inheritance tax
The manner in which CGT and IHT operate unfortunately works against each other. CGT is avoided if assets are held on death but this then precipitates potential IHT charges. The issue then becomes one of deciding whether to gift assets in lifetime or leave those on death by will. This requires calculations to be carried out to compare the respective consequences. It may, however, be noted that CGT is levied at significantly lesser rates (i.e. 18% and/or 28% against 40% for IHT in 2015/16) and on gains not absolute market values; other things being equal, this very broadly tends to suggest mitigating IHT should take priority over mitigating CGT.
Tax efficient distributions by executors to beneficiaries
In the example above, following his father’s death, Bob and Brian inform the executors that they don’t want the buy-to-let and ask the executors to sell it and give them the sale proceeds. This may prove unattractive from a CGT perspective. The buy-to-let at the date of sale is worth £110,000.
On sale, the executors will be liable to CGT at a fixed rate of 28% on £110,000 less £90,000 less £11,100 (i.e. £8,900) producing £2,492. It would have been more tax-efficient if Bob and Brian had asked the executors to transfer the buy-to-let to them (which does not give rise to any CGT charge; Bob and Brian acquiring the property at its market value on George’s death) and for them to sell it. In this case the aggregate gain of £20,000 would be split £10,000 to each of Bob and Brian which would be covered by each of their respective annual exempt amounts of £11,100 and no CGT charges would arise, saving them £2,492.
Income tax
There is little real planning which can be done with respect to income tax mitigation. In essence, income tax on income, which arises on assets owned at death, after death is ultimately borne by the beneficiaries who inherit the assets, at their rates of income tax.
Practical Tip:
Ascertain for any asset pregnant with a latent gain whether tax is mitigated if the asset is gifted in lifetime or should be left by will on death.
