CGT liabilities

Cpt.Pugwash

Are we threatened with CGT?
My wifes dearly beloved sister died in Jan 2011 and left her entire estate to 5 benificiaries. All 5 are close relations as she had no husband and no children. My wife is a benificiary and also one of the 2 executors.
The estate comprises of a house, valued for probate at £340k, a valuation accepted by the HMRC District Valuer.
Personal effects, including a car, of £7k
Savings and investments valued on the day of death of £222,500
We've completed the IHT400 and very happily (not really) paid an installment of £86k in IHT to the nice man at the other end!
We have the Grant of Probate.
The self assessment has not yet been filled in, but the only income of the deceased was a pension and some dividends.

In a nutshell, the executors are on the verge of exchanging contracts for the house for £355k, selling all the savings and investments, selling the personal effects, putting it all in one pot, dividing by five (after paying bills, more IHT, etc) and distributing the proceeds to the benificiaries.

The "pot" is a bank account setup by my wife, in her name, purely for estate administration purposes.
I think that's all the relevant background.

These questions are praying on my mind as we have had no professional advise.
Do you think that the Revenue might say to my wife that the money in the "pot" is her income and therfore income tax must be paid?
Could any of the executors or benificiaries be charged CGT directly as a result of this administration method?

Sorry for the long message, but I really would appreciate your learned opinions

ceeforcat

I have read this a couple of times and have to say that I cannot find any reason to pay CGT at all! Strictly there will be a chargeable gain on the house of 15000 (355000 less probate value 340000) which will be further reduced by the costs of the sale. The result is divided among five recipients and is well below the annual exemption of £10600 EACH. This will have to be declared but there simply is no liability!

Similarly all beneficiaries will receive their 'pot' as you call it but there simply is no further tax liability on this - that's why IHT was paid! It would appear that you want to pay tax twice.

Your method of distribution is perfect. Relax.

Whoops - didn't notice that you were a first time poster - hope I have eased your fears (unless I am missing something!)

Cpt.Pugwash

Thanks for dat ceeforcat
been a bit slow because I lost my log-in details

I'm pleased to hear what I hoped would be the case.
Having climbed a big curve discovering IHT I didn't relish the thought of learning some CGT

Do you think my wife is safe from the Revenue using her name on the "pot" account?

ceh209

It might have been better to put it in the name of 'The Executors of Mrs Cpt.Pugwash's sister', but I don't believe there's any requirement to do so. I do believe interest earned on the account (if any?) would form part of the estate though, and hence should be included in the self assessment?? Just document somewhere what you are doing and it will be fine!

ceeforcat

The only tiny issue I would have would be if, God forbid, something happened to your wife and the money found its way into her estate - distribution to other family members regarded as gifts. Very unlikely I know but is it not possible to open the account in five names, naming it, for example, 'the estate of xxxx deceased'? Alternatively, obtain some form of declaration to prove that money is not all belonging to your wife.The bank should be able to help with this.

ceeforcat

Beat me to it ceh209!

John_Pierpoint

Personally, as the executor of the deceased, I would write to each beneficiary explaining that I now owned the asset (land with a house on it) as their bare trustee and get the beneficiaries to confirm that they were happy for me to sell their inheritance (You cannot legally have five people owning a plot of land, they just have an equitable right to the proceeds of sale of their share).
This would document that the five know the score and that they might be liable to a CGT charge when completing their self assessment CGT pages, depending on their other capital dealings in the tax year.
[Perhaps I am being over cautious - but with five beneficiaries you all want to be singing from the same hymn sheet - remember it is the executor who carries the can financially - if the house is being conveyed by a solicitor, then perhaps the proceeds net of Estate agent commission and legal charges could be paid directly to each beneficiary?]

If your wife, as executor not bare trustee, sells ALL the shares and makes a loss, then the IHT due on the share values can be revalued to the actual sale price and thus 40% of the loss reclaimed.

Turning from Capital Gains Tax to Income Tax, here is a discussion about tidying up the income tax position to the date of death:
https://forums.moneysavingexpert.com/discussion/3447451

[Did your wife, as executor, get tangled up with paying IHT on dividends declared but not yet paid, at the date of death and accrued income on the savings accounts ?]

Income payments arriving after death are the income of the beneficiaries and should be reported to them as such on form R185. The first payment to the beneficiaries out of the estate pot is deemed to include the income to date. In theory the beneficiaries should report their new source of income. Some may have extra tax to pay, particularly those paying at higher rates or losing their age related higher personal allowances.

antrobus

On the other hand it does say here - http://www.hmrc.gov.uk/trusts/tax-when-someone-dies.htm;

Dealing with Capital Gains Tax due after the date of death

If the personal representatives sell capital assets from the estate, they are liable to Capital Gains Tax.

Whilst the Institute of Legacy Management (sounds impressive) state that;

CGT arises if an asset is sold after gaining value since death. The tax is calculated only on the gain since death. .... Executors pay CGT at a flat rate of 18% from April 2008. Executors do not have an annual exemption but there is an extension of the deceased's exemption for the year of death and the following two years.

Since HMRC - http://www.hmrc.gov.uk/rates/cgt.htm - confirms that the Annual Exempt Amount for CGT also applies to "executors or personal representatives of a deceased person's estate", I'd conclude that having sold a property for £355k that had a probate value of £340k, the executors have made a capital gain of £15k, and will thus have a tax liability of 18% on £5k, or about £900.

purple_haze

John Pierpoint and antrobus are both correct. The estate has a capital gain and will have a CGT liability if the gain exceeds its allowance, but there will be five separate annual allowances if the executor holds the property as bare trustee for the beneficiaries.

John Pierpoint’s method of writing to the beneficiaries for agreement to the sale would create the bare trust, but the simplest way forward would be for the executor to appropriate the property to the beneficiaries prior to exchange of contracts, which would involve a very simple document signed by the executor recording the appropriation.

Having said that, if the estate has been administered apart from the house sale (i.e. all assets have been collected in, debts paid and the extent of the residue ascertained), HMRC will treat the executor as holding the property on a bare trust for the beneficiaries even if no documentation records this, so it could be in this case the executor needs to take no further action.

Cpt.Pugwash

Thank you all for spending time to read and reply.
Tax rules and their interpretations are not easy to get to grips with.

All five of the benificiaries are close relatives, ie sons daughters of the executors. And all know whats going on though not in writing. There are no personal conflicts I'm pleased to say, and everyone is happy for everything to be sold. But of course none of really know the deepest implications of such a decision!

Getting the solicitor to distribute directly to the five benificiaries sounds like a good idea and I'll check it out.

Belatedly Barclays did start an executors account for us in the name of "the estate of etc" but it was so slow opening that we had to open the account in use now. !!

We did declare on the IHT400 all dividends that had been declared whether paid or not, but the only unpaid were from tax free investments anyway, so I think we should be OK there.

On the last point mentioned in your replies refering to CGT on the gain in house value of £15k. Could the gain be split between the two execs, £7.5k each, and therefore be below the £10k threshold? Or could it be split between the five benificiaries? I guess it's a question of exactly who legally owns what and when.

I've just noticed Purple Haze's response, ......... more to read and think about
Thanks

antrobus

An important clarification.

HMRC explains bare trusts here - http://www.hmrc.gov.uk/trusts/types/bare.htm