GCT help needed

naturewone

Can CGT be avoided if the valuation of an asset was too low when probate was granted if the time lapse cannot justify the valuation change.

My wife is the executor and sole beneficiary of her father's estate in which the main asset was his house. The sale was agreed at a price £24K more than the probate value (he died September 2009). Had the probate value been the same as the sale price no IHT would have been payable as the total estate value was still well within the allowance threshold. Unless house prices really have risen it seems a bit unfair that it was an undervalue of the asset that created the CGT liability. Is he allowed to offset the costs of disposal against the liability - the house is being sold in his name if that makes a difference. Many, many thanks for any pointers . .

John_Pierpoint

Ouch!
Having a executor sell in the name of the de-facto trust, that is the estate created by the death; is not a good idea unless the intention is to revise the IHT due; to match the real sale price rather than an Estate Agent's guestimate back dated to the date of death. Trusts don't have votes, so they don't get the allowances that individuals get.
As this was a simple "excepted" estate (?) presumably the IHT400 forms were not the ones supplied to HMRC?
When was the death to the nearest month?
What has the house sold for?
When were contracts exchanged?
Where is the property roughly speaking.
[This Zoopla heat map gives some idea of the areas of the country where prices might have increased since the dark days of early 2009.]
http://www.zoopla.co.uk/heatmaps/
How was it valued for probate.
When was probate granted?

If you do some searching on here you will find a discussion of HMRC attacking the method of giving half an asset to one's spouse and then selling it. [Together with endless threads about the complications of IHT v CGT v PPR - if they can't get you with the one they get you with another]

The other option would have been to do an Instrument of Variation to spread the ownership of the estate and then sell it. Obviously making legal changes costs money. There are some fairly complex issues about Income Tax & CGT coming due, during the period before the IoV is signed by the beneficiary giving up (some of) their inheritance.

naturewone

Thank you for your reply John. Ouch indeed!

It was form IHT 400 that was submitted and HMRC confirmed that no IHT was payable on the estate.

When was the death to the nearest month? Sept. 2009
What has the house sold for? £395
When were contracts exchanged? April 2010
Where is the property roughly speaking. North London
How was it valued for probate. An estate agent.
When was probate granted? Dec. 2009

We assumed that everything was settled and dealt with. It was only a passing conversation about CGT that made us think we might well have a gain to pay. Can probate be amended at all once granted? We have spoken to HMRC, the CGT helpline and the probate technical helpline but to no avail. The CGT helpline suggested it was the land registry we need to speak with but I can't see how that would resolve the problem.

John_Pierpoint

naturewone wrote: »

Thank you for your reply John. Ouch indeed!

It was form IHT 400 that was submitted and HMRC confirmed that no IHT was payable on the estate.

When was the death to the nearest month? Sept. 2009
What has the house sold for? £395
When were contracts exchanged? April 2010
Where is the property roughly speaking. North London
How was it valued for probate. An estate agent.
When was probate granted? Dec. 2009

We assumed that everything was settled and dealt with. It was only a passing conversation about CGT that made us think we might well have a gain to pay. Can probate be amended at all once granted? We have spoken to HMRC, the CGT helpline and the probate technical helpline but to no avail. The CGT helpline suggested it was the land registry we need to speak with but I can't see how that would resolve the problem.

I don't think I can give you advice on this, because in my humble opinion you have not done it the best way and since I "made" a nice little profit over the probate figure some years ago (great aunt's estate), I believe HMRC has tightened up on the procedures?

There is a very helpful poster on this part of the forum called "jimmo" , who is a retired "tax man" and I think he knows the ropes.

However here are a few observations:

As the executor completed an IHT400, this means that the estate was in the band £325 - 650K (ie the transferable spouse nil rate allowance was being claimed.)?.

Assuming the sale of the house for £395K is the gross figure, then the executor can deduct the costs of sale (ie estate agent and conveyancer charges) and probably the costs of any improvements needed to get the property into a saleable condition.

I would guess that the economic crisis created a nadir in London house prices, inside the M25 at about April 2009 and there was a bounce back by April 2010. [Here again "Zoopla" publishes a graph of local house price changes, so you could check that to see if I'm right about the downward spike in house prices and the amount of the bounce back}.

Did the executor ask for any legal advice about the tax position, when contemplating the sale of the property, or should the family solicitor have realised the tax implications involved when assisting with the probate?

Now this is probably a completely daft idea, but you still have a few days in which to create an Instrument of Variation. This could share the deceased's estate with other members of the family (ie you - your children? the Dog ? (sorry that was a joke based on the theoretical ability to create a trust from which animals can benefit) and back date the CGT implications to the date of death.
Then following through from that legal fiction the executor just might be able to argue that the value of the house vested in the list of beneficiaries and the executor was selling as their bare (?) trustee - thus getting some more CGT £10,100 nil rate bands into the equation and possibly some lower rate bands for CGT that would still be payable.

The HMRC web site offers this advice:

If the beneficiaries who are making the variation want it to have 'retrospective' effect for tax purposes, the variation must contain a statement of intent to that effect. The beneficiaries can choose whether the variation takes effect for Inheritance Tax only, for Capital Gains Tax only or for both taxes. For example, this statement would mean that the variation takes effect for both taxes.

'The parties to this variation intend that the provisions of section 142(1) Inheritance Tax Act 1984 and section 62(6) Taxation of Chargeable Gains Act 1992 shall apply.

http://www.hmrc.gov.uk/cto/customerguide/page21.htm

jimmo

Whilst I claim no expertise in Inheritance Tax my understanding is that, like any other Self-Assessment, there are opportunities to amend a Return. You may wish to look into that but, as long as no Inheritance Tax is payable either way, I wouldn't bother.
When it comes to Capital Gains Tax the Probate Value is very important if it has been "ascertained". If it has not been "ascertained" it is pretty well irrelevant.
http://www.hmrc.gov.uk/manuals/cgmanual/CG32224.htm
To try to illustrate that if the deceased left say £50k in cash plus the house and the full (double) IHT allowance of £650k was available then Inheritance Tax would only be payable if the house was worth more than £600k.
If the Probate Value of the house was declared at £200k, £350k or £500k the risk assessment process at the Inheritance Tax Office would ask the District Valuer (VOA) whether there is any danger that the house was worth more than £600k.

So, for the Capital Gains Tax issues, you can start from scratch.
What was the value of the property at the date of death?
If you are unhappy with the professional valuation you got for Probate purposes then it might be wise to go back to the same estate agent and ask him to reconsider but, if I have read your posts correctly, the valuation at the date of death is far more vulnerable to scrutiny for Capital Gains Tax purposes than it was for Inheritance Tax purposes.
If a Capital Gain has arisen the next question will be who is assessable on that Capital Gain.
Whilst I appreciate that your wife is both the executor and the sole beneficiary, she is effectively 2 separate persons for tax purposes and it is probably best to separate those 2 persons.
In its very simplest terms the executor has the legal obligation to gather in the assets of the deceased, pay off any debts including Inheritance Tax, pay for the funeral and pass what is left to the beneficiaries.
Here we hit the "Period of Administration" which really is a huge grey area but is very much tied into the "ascertainment of residue"
http://www.hmrc.gov.uk/manuals/cgmanual/cg30802.htm
In practical terms, if the executor had to sell the house in order to pay off the deceased's debts or pay for the funeral then the executor sold the house and is liable to any Capital Gains Tax arising.
If the deceased left sufficient liquid funds to pay for the necessities then it very likely that the house was sold, either by the beneficiary or perhaps, by the executor as bare trustee of the beneficiary.
Either way, the Capital Gains Tax will be the personal liability of the beneficiary.
My feeling is that when you get through the quagmire of red tape your wife will have a personal liability for any Capital Gain that arises but, as it has already been sold it is too late for her to gift a half share of the house to you.
As the deceased died in Sept 09 there is, at best, a month to organise a Deed of Variation. My guess is that, having come this far without professional help, your wife would be better off taking the tax hit than paying a professional to sort out the mess that seems to have been created.

John_Pierpoint

Well there you go, the executor writes herself a memo telling herself that she is her own bare trustee for the house she has now inherited, then she sits down and fills the boxes on the CGT pages of her self assessment tax return.

At least she won't have to fiddle about with indexation and taper relief allowances for the years of ownership, which used to be the pre 2008 CGT system for long term assets - I had to do those calculations to prove how much CGT I wouldn't be paying - when my mother died and the family home was sold.

This entry explains how CGT - a tax that did not even exist when I were a lad - has been simplified by splitting it into two systems one for people and one for companies.
http://www.hmrc.gov.uk/manuals/cgmanual/cg10243.htm

My practical experience proves that the systems for Income Tax, Inheritance Tax and Capital gains tax do not splice together when someone dies, they even use different rules for evaluating the same event.

Previous similar thread here:
https://forums.moneysavingexpert.com/discussion/comment/45653618#Comment_45653618

naturewone

Thank you both for your very informative answers. My wife and I have a lot to think about. Presumably if we had remained none the wiser to CGT in the first place HMRC would eventually contact us. We don't intend to go down this route as we would rather settle it all now than have it rear it's ugly head in the future.

John_Pierpoint

Assuming the exchange of contracts took place after 05apr2010 then your wife needs to contact HMRC now, if she is not already completing an annual self assessment.

The manual self assessment return needs to be received by HMRC by 31st October.

Let us know how this works out.

jimmo

If the exchange of contracts was after 5 April 2010 time may be tight, but not that tight. If the exchange of contracts was on or before 5 April2010 the OP's wife has already committed an offence and is liable to a penalty and to pay interest on the late paid tax. However I would not advocate rushing to contact HMRC.
At this stage it is not clear that there is a liability but, assuming there is, it is still not clear whether the executor or the beneficiary is the person liable.
That then begs the question of which type of Return needs to be submitted.
As long as the exchange of contracts was after 5 April 2010 the person who is liable has until 5 October 2011 to Notify Liability to HMRC.
This link is to the original legislation but I am sure it has been changed to 6 months.
http://www.legislation.gov.uk/ukpga/1970/9/section/7/enacted
This one is to an instruction manual which illustrates the 6 month time limit.
http://www.hmrc.gov.uk/manuals/chmanual/CH71220.htm
So there is still thinking time available but, by far the most important point is that the tax due needs to be paid by 31 January 2012.
The OP and his wife already have lots of things to think about and whilst contact with HMRC is one of them I suspect that their decision whether to seek professional help or go it alone is more important for now.

naturewone

Jimmo/John - can I ask for further clarification please.

You mentioned that if the probate value hadn't been ascertained, which it hadn't as there was no IHT to pay, then the figure was pretty much irrelevant and that we should start from scratch. What is the procedure to follow to start from scratch. Is it just a question of asking the original estate agent to give another valuation and if they agree, then how do we make HMRC aware of this amendment. Surely if my wife, when filling in a self assessment, just puts in this new figure then won't HMRC check that the figure matches the original probate valuation?

Really would be grateful for clarification on this please. How I wish I had your knowledge !

Many thanks

jimmo

To try to put this in perspective for you the Inheritance Tax Office and the Capital Gains Tax Office have different interests in your situation.
In post #3 you said that the house sold for £395. Assuming you meant £395k I assume that the value used for Probate was £371k. Sorry if I am repeating myself, but the Inheritance Tax Office would have asked the District Valuer whether there was any danger that the Probate Value returned was understated. If such a danger existed was it possible that the true value of the house would produce a liability to Inheritance Tax?
On the other hand the Capital Gains Tax Office will be more interested in whether there is a risk that the value of the house at the date of death has been overstated.
Whilst there is liaison between the Inheritance Tax Office and the Capital Gains Tax Office the all the Capital Gains Tax Office will be interested in is whether the Probate Value has been ascertained so that they are tied to it. As, in your case, the Probate value has not been ascertained, the Capital Gains Tax Office can do its own risk assessment of the value of the house at the date of death.
Nobody, apart from you, is going to get tied up in knots because the value declared for Probate is different to your wife's declared acquisition value for Capital Gains Tax purposes.
In [practical terms you need to consider whether the value of the house increased or decreased between the date of death and the date of sale.