CTG and self assessment

bujin

ceeforcat wrote: »

Does the increase in value of a property sold within an Estate always get divided by the number of beneficiaries?


You are confusing the issue - the property in no longer 'within an estate, after the will has been distributed. It is now the personal possession of the beneficiaries, of which there are two.

The house was sold within the time period of the administration.It was part of the Will that the house be sold and the funds from that sale be then divided up between the beneficiaries. As stated inmy first thread, he's about to become a beneficiary.Sorry if that was unclear.
So my original question is will CTG be paid if the increase in value was made during the Administration period?Thanks

bujin

Mikeyorks wrote: »

Indeed. But why do that when the original question is clearly answered. Theres no harm in reading!

And if you then want to throw in a supplementary - at least then have the nouse to seperate the replies.

So the only people who can use the board are those with nouse.Well it wouldn't be running for long would it!

John_Pierpoint

As the estate(s) have been paying solicitors to deal with winding them up, the solicitors should be able to tell the beneficiaries what is happening and why. If they are doing a good job, they should check the beneficiaries tax positions and proceed as "instructed" through the executor.

As these are probably relatively small estates, how was the probate value agreed with HMRC ?

I can remember seeing postings from someone under the name "jimmo", explaining the tangles that he encountered with estates that tried to fudge the figures, when he got in on the act as an inspector for Capital Gains Tax.

It is important to be clear as to who sold the house(s), when, in what capacity, and instructed by whom.
Individuals have an annual nil rate CGT band of (currently) £10,600 per person per fiscal year.
A trust (for that is what an executor is administrating) gets one nil rate band of half that of an individual per fiscal year.
So there is scope for distributing the beneficial ownership of the house to the beneficiaries (and possibly to their spouses/legal partners) before spending money on it and realising a gain.
Whose money was spent "improving" one of the houses?

There is scope for retaining (say) the shares in the estate, to make use of its nil rate band, when they are sold.

There have been some suggestions in this forum that CGT on property is an area receiving closer attention from HMRC these days, or more likely the new computerised systems and their de-skilled administrators, do not allow any "fudge" factor.

See what the (hopefully one armed) solicitors can offer by way of explanation. Then double check it on here!

bujin

Thanks John. But other than the conveyancing, the brothers have acted by themselves because as explained,they are both executors and beneficiaries,so no solicitors have been involved to ask.
As far as I'm aware the probate value of the house was sought through an estate agent when filling out the forms for probate. The Estate was less than the amount for Inheritance Tax.
The money spent on the property to develop it, came from money in the estate bank account, after all other liabilities had been paid.

I must admit to being somewhat confused.
ceeforcat said above;
You are confusing the issue - the property in no longer 'within an estate, after the will has been distributed. It is now the personal possession of the beneficiaries, of which there are two.

The Will won't be distributed as such until after the house was sold and all liabilities left unpaid are paid, then the monetary value will be given to the beneficiaries. Can you clarify?

jimmo

Bearing in mind that ceeforcat posted before you posted at #12 I think ceeforcat’s post probably reflected what normally happens following a death.
However, in post #12 you have said “The house was sold within the time period of the administration. It was part of the Will that the house be sold and the funds from that sale be then divided up between the beneficiaries.”
It is rather unusual nowadays for the deceased to have instructed in their will that the house must be sold and the proceeds between the beneficiaries.
So, under the terms of the will, the executors were required to sell the house and, after the executors had sold the house, pay the money realised to the beneficiaries.
Therefore the house was sold by the executors and the executors are liable to Capital Gains Tax.
I am afraid therefore that the executors are liable as trustees Now, provided the house was sold within the 2 tax years following the death, the trustees are entitled to the full annual exempt amount for a person, not the (reduced) trustees amount.
http://www.hmrc.gov.uk/rates/cgt.htm#1
So, using your own figures, the executors are liable to Capital Gains Tax as follows.
Proceeds of sale £155,000
Less probate value £130,000
Less improvements £10,000
Capital Gain £15,000
Deduct Annual Exempt Amount £10,600
Amount chargeable to tax £4,400
Tax due at 28% £1,232.
You can tweak this a bit to take account of solicitor and estate agent charges for the sale.
2 further points to consider.
1) I, personally, don’t believe that you have any scope to change the principles of the tax calculation I have given above.
When John said “So there is scope for distributing the beneficial ownership of the house to the beneficiaries (and possibly to their spouses/legal partners) before spending money on it and realising a gain.” I believe he was alluding to a Deed of Variation.
A Deed of Variation, very basically, enables the beneficiaries of a will to pass on a part (or the whole) of their inheritance to someone else. In your particular case the beneficiaries were due to inherit cash, not the house, so I don’t believe a Deed of Variation can have any effect on the destiny of the house. It had to be sold by the executors. End of.
Take a look here. Its an HMRC checklist but I think it backs up my argument that the only people who can make a Deed of Variation are those who are foregoing something.
http://www.hmrc.gov.uk/cto/iov.pdf

Call me a taxman if you like, but unless someone else comes up with a better solution I rather think that your partner and sibling may be better off taking the tax hit of something less than £1,232 between them than trying to find and pay professionals who may be able to reduce the tax bill.
2) As I see it the probate value of the house is a much bigger potential problem.
When the deceased died your postings clearly indicate that there was precious little possibility of an Inheritance Tax liability arising and the Inheritance Tax Office will almost certainly have accepted the probate valuation as not worth persuing.
The Capital Gains Taxman will see thing differently. He will almost certainly want to know if the probate valuation was excessive.
For more details here is a link to the thread that John was possibly referring to when he mentioned me.
https://forums.moneysavingexpert.com/discussion/3446759
Whether you like it or not, your partner and sibling have a pretty complicated tax situation to deal with. If you can absorb all that come back and say so and I, or someone else, will guide you through the next steps, but we will have to start talking real details.

John_Pierpoint

Thanks jimmo for your detailed explanation of how complex the decisions on property can be.
As an amateur, I have had to steer three estates through probate/IHT/CGT in the last 15 years and all three have thrown up issues over valuation.
The first one was before the public had access to individual Land Registry figures, so I found myself arguing from a position of weakness:
"I know what you are trying to do. but I would ague that you have sold it too cheaply in that case ...........". [we agreed to split the difference in my back projected probate valuation]
The second one:
"Provide us with a valuation for the start of CGT 20 years ago back in the 1980's, then the inspector will decide of this transaction is exempt from CGT ............." [I went boss eyed looking at microfiche of 20 year old house adverts].
The third one:
"Prove that the collapse of the banks in 2008 has made this [almost derelict] house the second cheapest in the road..........".
[I provided a compare and contrast set of particulars, along side those for the other little old houses that had been turned into mini palaces]

A deed of variation, if it were possible, would probably cost something in the range £500 - £1,000.

I find myself very much sitting on the fence, in the argument that probate requires good professional advice. Good professional advice is worth every penny, but there is a lot of far from good advice on offer.

What I do know is that for every will there is a potential cuckoo in the nest or elephant in the room, in the form of an extra beneficiary HMRC wanting their share. Those making wills must realise this. I do wish that solicitors holding wills would regularly review them from the point of view of this unmentionable beneficiary.

bujin

Thanks jimmo that's made it much clearer. Strangely enough both of the Wills we've been involved in have both expressed that the property and any other etcs should be converted to cash and the proceeds distributed as cash.They were both written in the 1980's and unchanged since then.

My husband and I have just received our share from the other Will I mentioned, the Solicitor hasn't mentioned anything about CGT even though the house in question also had a lower probate value, to the final sale value, as it was only about £10,000 it would appear there'd be nothing to pay, but as has been suggested on here, we still need to let them know and they might it seems decide otherwise. Should the Solicitor involved in that case have advised us about this or is it down to us? I am presuming that as the Estate was wound up pretty quickly, the difference between the Probate and Sale was not contested otherwise the Solicitor would have advised us that there was a delay and why.

In regard to this case, the brothers aren't worried about paying CGT, they just want to be absolutely clear about what they should do.The person died in April this year and the house sold in November.
Most houses in the same road sell for about £150,0000 in very good condition, I really don't think we'd have any problems proving the house had fallen into disrepair and the valuation was done taking into account what work was needed to bring it up to a similar sale price and how much that would cost. We were able to get it done more cheaply because, we have contacts.We have photos and receipts for all work and labour charges etc.

From what you say they can apply the Allowance for a person and not the reduced amount. Is there only one Allowance, doesn't each executor/beneficiary get an Allowance, or is this an Allowance for the property rather than the number of persons involved. Each beneficiary in this case is also an Executor.

Anyway,here are the actual figures;

Probate Valuation £130,000
Sale £154,999
Cost of Repairs etc £10,500
Conveyancing Costs £750
Estate Agents Fees @1.5% £ 2324.985
Capital Gain £11,424.01
Less Allowance £10,600

CapitalGain Chargeable to Tax £824.01 *28%= £230.722

Hopefully that's correct. I suppose the only issue now is whether it's accepted by HMRC.Would really appreciate your comments once again.

Just as an aside is there any benefit to not stipulating that property for example should be sold before the beneficiaries. We'll be writing a Will shortly, so it would be good to know.

nad1611

I'm in a similar position so would be interested to get someone's feedback on bujin's last thread.

jimmo

If you don’t mind I will look at the continuing issues with the estate that you asked about first and come back to the other estate later.
As you have referred to your partner and his sibling as both executors and beneficiaries I rather assumed you knew the difference. However, just in case, each of your partner and his sibling have 2 separate legal identities in this estate.
1) they are the executors.
2) They are individual human beings who happen to be beneficiaries.
Legally the executors (or trustees) are a single entity (or person) having a legal responsibility to deal with the affairs of the estate.
As beneficiaries they are simply people, individually responsible for their own tax affairs, and entitled to receive their inheritance from the separate legal body that is “the executors”.
I do hope that makes sense.
In accordance with the terms of the will, the single legal body, the executors, sold the house and is liable to pay any Capital Gains Tax arising.
That single body, the executors, is entitled to a Capital Gains Annual Exempt Amount and the tax rules dictate that in the particular circumstances here, the Annual Exempt Amount is identical that which is available to each and everyone of us as individuals.
So, on the sale of the house, there being no other Capital Gains disposals by the trustees, there is a single Annual Exempt Amount of £10,600.
Therefore the single body, the executors, has a tax liability of £230.72.
The single body, the executors, now has a legal responsibility to declare its liability to HMRC, make any Tax Returns required and to pay any tax demanded.
Incidentally, as you may have gathered, I agree your computation in post #18 and whilst what you say about the probate value of the property seems entirely reasonable I really could not judge any more than that I am afraid.
Your partner and his sibling, as individuals and beneficiaries have nothing to do but receive their inheritance.
With regard to the solicitor, I am not a legal eagle, just a tax man, but my best guess would be that the single body, the executors, engaged the solicitor to deal with specific tasks on its behalf rather than deal with the estate as a whole. For example if the solicitor was asked to deal with the sale of the house and assuming no tax advice was requested, the solicitor had no obligation to give tax advice.
Turning now to the supplementary issue of you and your partner being beneficiaries of a different will, if your are simply beneficiaries, not executors I would suggest that, legally speaking, it is none of your business whether the single body, the executors has got the tax situation right or not. If the single body, the executors, got it wrong that is its problem. However, assuming its all family, you may want to pass on what you may have learnt here.
Turning now to your own wills I would say that in tax terms there is a lot to be said for leaving the house to the beneficiaries to deal with as they see fit rather than the deceased having forced the issue by compelling the executors to sell the house.
In your partner’s case he and his sibling would have saved the £230.72 that they will now have to pay but you may need to ask yourself whether tax is the only issue.

John_Pierpoint

A beneficiary is entitled to ask for accounts showing the administration of the estate. From my limited experience most solicitors don't publicise this as they work on the principle that "what they don't know cannot hurt me".
However now that you know as much about the way the system works as the solicitor does, the beneficiary can reasonably approach the solicitor as one professional to another (no professional likes arguing with a "barrack room lawyer").
Politely asking if he or his clerk can run through the implications of his CGT tax calculation and its possible effect on your self assessment tax return, should be received positively.;)

I think, thanks to jimmo's input, this is now the definitive thread on IHT v CGT and I have gone back to the previous one and corrected my misconception:
https://forums.moneysavingexpert.com/discussion/3585829

Here are some other insights:

A. Someone with IHT exempt farm land trying to turn the normally "cheaper" CGT back into IHT.
http://www.taxation.co.uk/taxation/articles/2001/10/18/1378/replies-queries unwanted-profit

B. For those who may have decided on here that being a DIY executor is a money saving doddle, how about this for a horror story, involving a DIY executor named Lever:

http://www.taxation.co.uk/taxation/articles/2010/01/20/19849/executor-trial

As this comment on the magazine story in effect says: Rushing into the sale, when you are not sure what you are doing can mean paying too much tax.

Never mind the penalty, what about the IHT itself?

I hope I have pieced together the story correctly, but I am curious why Mr Lever appears to have agreed with HMRC at an early stage that the IHT due should in any event be based on the later (higher) sale price of the property, not on the professional valuation at the date of death. A sale at a considerably higher price shortly after death (in this case 3½ months) would justify the DV questioning the valuation, but it does not automatically follow that the valuation was incorrect, as Mr Lever's comments on 'open market value' indicate he appreciated.

One final comment - Was the aggrieved Mr Lever doing the job again post 2008, I think he would have been forced to use the "new" slower more comprehensive IHT400 procedures, just in time for the recession to devalue the house anyway :eek::mad: