Capital Taxes: Capital Gains (CGT) v Inheritance Tax (IHT) valuations.

John_Pierpoint

Continuing the saga of Mr Dog:
http://forums.moneysavingexpert.com/...html?t=1164505

Just to set the scene, I have previously sorted out the estates of two relatives, but these were in times of rising asset prices.

Mr Dog, who died last Autumn, turns out to be liable for Inheritance tax (IHT) in his case 40% of everything over 624K.
So I will be selling his shares and his house and perhaps some of his furniture, so that I can (1) distribute the proceeds amongst the several beneficiaries & (2) obtain the loss since last Autumn to be off set against the IHT that the estate has had to pay.

Do I understand the Capital Taxes rules correctly:
For Capital Gains Tax (CGT) The asset's value is its sale price LESS the cost of the sale (Stock broker's commission/Estate agent's charges/etc.)
BUT
For Inheritance Tax (IHT) The asset's value is the sale price?

It seems illogical to me but is that the position with the two taxes?

fengirl_2

CGT is payable on the sale price (less costs) less the purchase price or Probate value, whichever applies. CGT is not payable on death.
IHT is payable on the value at the date of death.

John_Pierpoint

fengirl wrote: »

CGT is payable on the sale price (less costs) less the purchase price or Probate value, whichever applies. CGT is not payable on death.
IHT is payable on the value at the date of death.

Hi fengirl,

I think you have missed the point in a falling market.

As far as the house is concerned, I can claim the real selling price as a substitute for the IHT guestimate from the local estate agent last Autumn. In fact if I sell it and make a profit, the Capital Taxes office will soon be after me for their share.

Similarly the shares are down in value and I can sell those any time in the 12 months following death and substitute their real value.

As the tax raising tail now wags the legal dog, I cannot do anything legal until I have paid the Inheritance tax. So the figures on which I have paid the tax must differ from the figure at which I (legally) sell the assets. By definition it has to be a two stage process, where I and the tax man settle up for the differences eventually (and pay or receive some interest on the original inaccuracy).
On a previous death, I took a year to sell the house but using the Land Registry figures, I was able to demonstrate that the extra 40K was capital gain (CGT) not IHT liable. I cannot see that situation repeating itself this time.:rolleyes:

My question is "does the real tax paying value for CGT and IHT differ in that costs of sale are not allowable for IHT purposes - or have I got the wrong end of the stick?"

(It sounds illogical BUT I know there is not such thing as logic when it comes to tax rules).

John.

PS Think about the situation of the pensioner "Sir Fred" and let us pretend his estate consisted of a million pounds of bank shares
last Autumn. His estate would be well and truly bankrupt by now if it tried to pay the tax on his shares by selling them; 600p down to 10p in 5 months takes some doing..

Murdina

CGT rules allow for certain deductions. These are, broadly, the costs of purchase and sale of the asset and any improvement expenditure reflected in the asset at the time of sale.

For IHT what you are doing is using a relief whereby the sale proceeds are substituted for the valuation at date of death. As far as I am aware, for this purpose sale proceeds are not defined as being net of any costs of sale.

jimmo

Does this make sense?
http://www.hmrc.gov.uk/manuals/cg2manual/cg32301.htm

John_Pierpoint

I've read the link above four times:rolleyes:

I think it translates into ...........if you are running the estate as part of an ongoing trust you can claim the costs of sale as a loss for future CGT (Capital Gains Tax) computations. I cannot think of a way of passing these costs to the beneficiaries, who are not the sort of people to be making capital gains in the future anyway.

I took the opportunity to blunder about in the wealth of bumph that is the Inheritance Tax (IHT) system.

I've tracked down forms IHT35 and IHT38, which I am likely to need in due course.
Their instructions make it clear that no expenses of sale are allowed:
The relief is based on the gross price, but restricted by the net price of any purchase. So you must exclude any expenses relating to a sale or purchase (eg commission, stamp duty, legal fees...)
(I think the reference to purchases refer to the period of probate when the will trust could be run as a mini investment trust and do its own [STRIKE]investing[/STRIKE] gambling with shares and property.

When it comes to equities, the form confirms that "normal" shares are covered and Unit Trusts - presumably the tax man classes "OEIC's/ICVS's" in the term Unit Trust, they have only been around for a dozen years. They are companies and don't have a trustee as such.

Whenever I found guidance that looked interesting I came up against this information:
(This text has been withheld because of exemptions in the Freedom of Information Act 2000)
I think these were instructions to the staff not to waste more money chasing tax than the tax was worth.

Certainly when it comes to property, there is the following guidance:
Relief is not available if the sale price differs from the value on death by less than £1,000...........

Translation: If you are trying to claim back less than £400 of over paid tax, forget it, the government needs it more than you do.

jimmo

John_Pierpoint wrote: »

I've read the link above four times:rolleyes:

I think it translates into ...........if you are running the estate as part of an ongoing trust you can claim the costs of sale as a loss for future CGT (Capital Gains Tax) computations. I cannot think of a way of passing these costs to the beneficiaries, who are not the sort of people to be making capital gains in the future anyway.

I think you’ve got it. However the usual problem is that if you sell the assets as executor realising an executor’s loss the loss is only available to you as executor. You cannot pass the loss to the beneficiaries.
However if you sell as bare trustee of the beneficiaries the loss is actually theirs.
That all seems a bit academic in this case but I can expand a little if needed.
My point in posting the link was that it seems to confirm your original question that IHT is based on the value of the assets whereas CGT is based on the net proceeds of sale.
I am afraid that when it comes to IHT I can do no more than blunder about the bumph as well but I do think you are barking up the wrong tree regarding the cost of purchase. If a trust exists and it buys and sells assets then the trust will realise Capital Gains or Losses. That is a claimed professional opinion.
IHT is all about the value of the estate at the date of death. My personal interpretation would be along the lines of say
Mr Dog bought shares for £1000
At his death they were worth £2000
A year later they were sold for £500.
The initial Probate value will be £2000 but on sale the relief available will only reduce the Probate value to £1000 and not £500.
That is definitely not a professional opinion but I do think like a taxman.