A review of Capital Gains Tax implications for probate cases by Joanna Pitchfork
Capital Gains Tax is one of the lesser-known taxes and causes confusion amongst many people, especially in Probate cases. In a simplified form, Capital Gains Tax (CGT) is the governments’ tax on the sale of, or when you dispose of, an asset you have made a profit on due to an increase in value. The tax is only on the amount of money gained (profit) or on the benefit from the sale, and not the overall money received for the item.
The tax, as mentioned previously, mentions disposing of an item, this term covers giving the item to someone else as a gift, swapping it for another item, or receiving compensation for the item. Most relevant to Emsleys and our clients this also covers the inheritance and passing of items and assets after death.
There has been a raft of changes in how the government has taxed Capital Gains over the last few years, and many of our readers will be aware of the current headlines around Capital Gains Tax and the upcoming election.
To further complicate the nature of how this tax is applied, there is a basic allowance on the profits/increase in value which is ‘tax free’.
This amount of tax-free allowance has undergone regular changes and in the tax year 2023/2024 the Capital Gains Tax allowance was reduced by the Government to £6,000 from £12,300. At the start of the tax year 2024/2025 the Capital Gains Tax Allowance was then further reduced to £3,000. Currently, Capital Gains Tax on property is charged at 24% and on any other asset gains at 20% for basic rate taxpayers and 28% for higher rate taxpayers.
With regards to Private Client matters, Capital Gains Tax is a conversation we have with clients on an almost daily basis, whether during the course of taking Will instructions or dealing with a Probate or Trust matter, the topic crops up again and again. Financial regulations and Tax implications are all regular part and parcel of our work. There are many assets which have different levels of taxation and this all has to be worked out correctly and paid before any of the assets can be distributed to our clients.
One of the most significant areas that falls under the Capital Gains Tax umbrella is property.
When dealing with Wills, many clients wish to include some kind of Trust arrangement on their deaths regarding their properties. This ensures that the eventual sale proceeds get to the correct beneficiaries however clients seldom realise that the value of their property at their date of death will become the ‘acquisition value’ of the property for the Trust.
An example of this:
- Mr A and Mrs A create Trusts in their Wills over their property C held as Tenants in Common.
- Mr A then dies, and the value of the whole property C is determined as £300,000.
- Mrs A continues to own and live in the property so is exempt from Capital Gains Tax as she would benefit from principal private property relief (the house that you own and live in is exempt from CGT) but the ½ owned by Mr A transfers into the Trust with a value of £150,000.
- If the property C is sold during the lifetime of Mrs A the half transferred into the Trust may be liable for CGT at the acquisition value from the date of death of Mr A.
- If the sale price of the whole property is £350,000 then the Trust half will be making a gain of £25,000 on top of their acquisition value of £150,000. CGT must be declared by the Trustees and paid to HMRC within 60 days of the completion date. The Trust only has the use and benefit of half of the personal allowance, so an allowance of only £1,500. Plus if there is more than 1 Trust, this allowance has to be split between them.
When dealing with a Probate Matters, it is imperative that any property is valued accurately for Probate purposes. There is an automatic uplift, i.e., a reset, in the value of a deceased persons property at the date of their death. This ensures the assets of the estate are fairly considered however there is danger here that the Executors do not get a professional, up-to-date valuation of the property in good time. There is a risk that in the time taken to bring the property to market there is an increase in value on the property, this can be commonplace in complicated estates or when family are abroad or present complications.
As an example:
- Mr D has lived in and owned his house for 50 years. He purchased the house in 1974 for £10,000. At the date of his death in 2024, the property has a market value of £200,000. There is no CGT arising so far, as this is the automatic uplift to the date of death value.
- However Mr D’s Executors do not get a professional valuation for Probate and guess that the value is £180,000, so this is the value declared, in effect, for the automatic uplift and therefore the starting position to calculate any gain.
- When the house goes on the open market, the estate agents recommend an asking price of £210,000 and offers at this level are received. This is a gain of £30,000 on the value declared as the probate value. From this gain the Executors can deduct the £3,000 allowance plus the costs of sale (estate agents fees and conveyancing fees) plus in certain circumstances allowable expenses as set out in the HMRC Capital Gains Tax Manual, section CG30570, but they will still be left with a large gain to report and CGT to pay. This has to be declared to HMRC.
- If Mr D’s Executors had accurately valued the property for Probate purposes, then they would likely still have had a gain to declare but this would have been much less.
Further to property, if there are shareholdings in a Probate Matter, these must again be accurately valued as at the date of death to be able to calculate any gain or loss at the point of sale. Any loss can be offset against other gains but any gain over £3,000 needs to be declared and the relevant CGT paid.
As during lifetime, if the deceased owned any ISA’s then any income and gains are exempt as the ISA retain the tax free status for up to 3 years from the date of death.
Probate can present significant complications and calculations for those grieving the loss of a loved one. With constantly changing brackets and charges there would be difficult for most individuals to keep a track of these changes.
At Emsleys we are here to help, all the way from the start of the process in creating efficient Wills and Trusts, we are here to support and advise upon Probate and guide the way through handling estates and the potential tax and inheritance elements.
