Is Capital Gains Tax Payable on Inherited Property?
As a general rule, there is no capital gains tax charge applied when somebody dies. However, special rules do apply in relation to how assets are handled during the administration period. This is the period in which the executors or personal representatives of the deceased are tasked with settling the estate. It will begin on the day following the date of death of the deceased and ends when all of the necessary steps to complete the administration of the estate have been taken.
Capital Gains Tax for Personal Representatives and Executors:
In general, assets that were owned by the deceased will initially be treated as though they were passed to the personal representatives or executors at the date of death. Due to this, any property that is solely owned by the personal representatives or executors during the administration period may incur a CGT liability if the value of the property has increased since the date of death. This will usually be paid out of the estate.
On the other hand, the distribution of an asset to a beneficiary of the estate will be treated differently for the purposes of determining capital gains tax on inherited property. When the administration period for the estate is completed and the assets that remain in the estate are subsequently distributed until the provisions of the will or intestacy rules, no capital gains tax will apply. Instead, any property assets are treated as though they were passed to the beneficiaries at the date of death at the market value that was true for that date.
The Deceased’s Residence Status:
In general, only UK tax residents will be liable for paying capital gains tax. However, the personal representatives or executors of the deceased’s estate will be treated as having the same residence and domicile status. Because of this, if the deceased was not a UK resident before their death, the personal representatives or executors will not be liable for any asset sales or disposals even if they are resident in the UK.
There are some circumstances where despite being a non-resident in the UK for tax purposes, the deceased may have still been liable to pay capital gains tax on the disposal of a certain asset. In this case, the personal representatives or executors will also be liable to pay CGT on the disposal of that particular asset. There may also be a liability to CGT on any inherited properties for the periods up until the date of death when the deceased had recently disposed of assets but had not submitted a return.
Capital Gains Tax on Inherited Property Sale for Beneficiaries:
When you inherit a property asset, the inheritance tax will typically be paid out of the estate of the deceased. Inheritance tax will become payable in the event of the estate’s value, after any debts and expenses are paid, exceeds the relevant nil rate band for the tax year in which the person who died has passed away. As a beneficiary, you will still be liable to pay CGT if you subsequently dispose of any assets that were left to you and if the assets have appreciated between the acquisition and disposal dates.
Deeds of Variation:
A deed of variation can sometimes be put in place to make changes to how the estate is distributed. This means that individual beneficiaries are able to redirect their inheritance to another person should they wish to do so. If this document is legally valid and certain conditions are met, the variation will not be treated as a disposal for capital gains tax purposes. However, there are some rules to be aware of, including that the deed of variation will need to be executed within two years of the date of death, and it must provide a clear statement regarding the relevant legislative provisions that apply.
How Much Capital Gains Tax is Paid on Inherited Property?
Capital gains tax is calculated on an inherited property by looking at the difference between the value of the asset at the date that it was inherited and the value of the asset at the date of disposal. This will calculate the chargeable gain. The market value of an asset will typically be ascertained for inheritance tax purposes, which is known as the probate value. Capital gains tax on inherited property that is disposed of in the future by personal representatives, executors, or beneficiaries will be calculated on the basis of the probate value being the same as the acquisition value. In addition, it may be necessary to consider the market value of an asset at the date of disposal, where the asset is sold, transferred, or given away. This is defined as the price for which assets might be reasonably expected to sell for in the open market.
When the sales proceeds or market value does not exceed £6,000, you do not need to calculate any chargeable gain on the sale or disposal of an asset. If the market value or disposal proceeds exceed £6,000, the amount of capital gains tax that is payable will be dependent on several different factors, including the applicable CGT rate and the chargeable gain amount.
Capital Gains Tax Rates:
The rate of capital gains tax on inherited properties can vary, depending on the beneficiary’s taxable income, the nature of the asset, and many other factors. You will need to add any net gains to your total taxable income in order to work out the applicable rate. The standard rate of capital gains tax is set at ten percent for assets other than residential property, with two figures combined that are below the basic rate threshold. Anything that exceeds this threshold is set at a higher rate of 20%. The standard rate of CGT is 18% on residential properties, with a higher rate of 28%.
The rules surrounding capital gains tax on an inherited property can be very complex, particularly when determining the market value of a disposal. For this reason, it’s a good idea to seek advice from an expert.