How and when capital gains?

wierddumpling

Hello everyone, sorry if this has been asked before but how and when do you pay CGT?

Basically I've inherited half a property which today has had an offer 25k over probate value (not quite excepted yet as there are 4 people bidding and you know what estate agents are like)

My understanding is that we each can have £10,600 before CGT kicks in so if we sell at that price we'll have to pay tax on £1,900 each.

If I am right, what happens next?

xylophone

http://www.hmrc.gov.uk/cgt/intro/working-basics.htm

jimmo

Your sums are sound enough but the date of disposal for Capital Gains Tax purposes will be the date of exchange of contracts. If exchange doesn’t happen until after 5 April the annual exempt amount will increase to £10900.

You may also want to know that the probate value only has any real significance if it was “ascertained”. That is if the deceased’s estate actually paid Inheritance Tax.

Otherwise it is just an opinion of value which has not been agreed by HMRC and HMRC are very likely to query it.

What happens next:

If you do not normally complete Income Tax Returns you will need to advise HMRC that you have realised a taxable capital gain. I would suggest you send them a copy of your calculation. It will then be up to HMRC to decide whether to deal with your liability informally as a one-off or to issue a Tax Return.

Either way if contracts are exchanged before 5 April the tax will be payable by 31 January 2014. If contracts are exchanged after 5 April the tax will be payable by 31 January 2015.

John_Pierpoint

How close to the grant of probate is the sale?
Did the executor go to the bother of putting the property into the names of the two beneficiaries (I doubt it) ? Did the beneficiaries think of splitting their share with their spouses?
Did the executor explain the score to the two beneficiaries and agree their instructions for his/her handling of the sale as bare trustee ?
What sort of valuation was obtained for probate (as at date of death) and how long ago was this valuation obtained.
Was the estate an "excepted estate" in other words one that did not get assessed for IHT.

[I write as an executor having to handle the sale of a £350k house with 10 beneficiaries in the midst of the financial crisis]

If IHT is payable (at 40%), the sale of an asset can be an opportunity to play heads I win tails you lose, with the tax man. - you sell at a loss then the tax man refunds the 40% on the loss; you sell as individual beneficiaries and the gain has £10.6k per beneficiary deducted (assuming the beneficiaries have no other capital disposals, that year. Is there something else you can sell at a loss ? ).
Since about 4 years ago the ownership of land passing to new owners has to be registered [prior to that one completed an assent and put it back in the deed box, or did not bother do do anything, which came as a surprise to the executors of widows - a maximum of 4 people can be legal owners of land, the extras cannot be more than beneficiaries of a trust. ]

Fortunately the property market is reasonably stable at the moment, so a £25k profit on a £50k house is suspicious, but not so on an agreed probate valuation of £500k as at 12 months ago.

[Edit: Well perhaps it would be suspiciously honest, as £6k of the extra £25k has gone to the tax man as stamp duty]

wierddumpling

Firstly thanks to all that posted :T

A few details-

Probate only just gone through

Land registry not changed

Both benificiaries unmarried

No IHT paid

Probate value £200,000

Property valued around aug/sept last year

No assets to sale at a loss

jimmo

As no Inheritance Tax was paid, as I said in my last post, the probate valuation doesn’t mean very much and you certainly don’t have to use it in your capital gains computation.

The first thing I suggest you ask yourself is how much have house prices changed in the area in the area since the date the deceased died?

Is a £25k price increase realistic?

If not, you need a revised valuation as at the date of death.

You don‘t actually need a professional valuation. You are quite free to make your own if you wish.

Also, once the house has been sold you can effectively seek HMRC’s opinion by requesting a Post Transaction Valuation check using form CG34.

http://www.hmrc.gov.uk/forms/cg34.pdf

Strictly speaking you are not asking HMRC to make a valuation, you are asking them to check yours but it does not matter whether your valuation is professional or amateur, HMRC will check it if asked.

I guess its then all down to self confidence. Can you, and your co-beneficiary, handle this yourselves or do you need professional help?

Unless there is something special about the house it seems that the professional did did the probate valuation didn‘t do you any favours.

You may also wish to consider whether paying an accountant and a valuer would be more expensive than paying the tax.

getmore4less

Even without IHT the valuation will potentialy have been looked at by HMRC it will depend how close to the nill rate band the estate was.

If no IHT is due it is usual to err on the high side, being out by 20% on the low side is careless. has work been done?

John_Pierpoint

For what it is worth, I have sold three houses as executor/bare trustee.
In one case there was not IHT or CGT to pay and HMRC were happy to agree my figures - or to be more accurate my sister's CGT sailed through with no problem and I got a "prove it" response.

In the other two cases it was worth my while to minimise the IHT and maximise the CGT. (because of multiple beneficiaries).

In the 1990s example, where I was claiming that £250k of valuation at death had risen to nearly £300k in a year. I found myself up against a hard nosed Scots woman after I had sent in my "evidence". This was in the days before we all got access to the Land Registry figures for individual properties. All I could buy was the figures for the local post code (and it was indeed an area of rapidly rising house prices but also one of Edwardian house being given "make overs" with rooms in the roof and kitchen extensions into the back gardens.).
[Now we can all have a nosey look using sites such as:
http://www.zoopla.co.uk/house-prices/ ]
Her opening gambit was that the increase could not have been more than £25K, not £50k. Her advantage over me was that she could quote individual houses, we settled on a split the difference and agreed the capital gain was £37k not £50k - I still feel she rather got the better of me, but as my share was 1/8th the numbers did not make a huge difference to the individual beneficiaries.

The 2008 valuation was referred by the IHT tax man to the Valuation Office Agency and I got a phone call asking me to justify the cheapest house in the street. As it was almost the last house that had not been the renovated and extended since Victorian times, my estate agent aided valuation, backed up with photos of the dilapidation, was accepted as the IHT valuation.

Jimmo - out of interest, what is the point where HMRC agrees that the executor is selling as bare trustee of the beneficiaries and not as the trustee of the estate? Obviously having beneficiaries each with a CGT personal allowance of £10.6k can considerably reduce the tax take.

jimmo

John_Pierpoint wrote: »

Jimmo - out of interest, what is the point where HMRC agrees that the executor is selling as bare trustee of the beneficiaries and not as the trustee of the estate? Obviously having beneficiaries each with a CGT personal allowance of £10.6k can considerably reduce the tax take.

Normally the key question is the date when the residue has been ascertained. That is the date when the executors can define the assets and debts of the estate.

http://www.hmrc.gov.uk/manuals/cgmanual/CG30800.htm

The date the residue is ascertained marks the end of the period of administration and the date that the beneficial ownership of any “free” assets passes from the executors to the legatees. Any assets still held by the executors after the date of ascertainment of the residue will then be held as bare trustees of the legatees.

However, the disposal of beneficial ownership by the executors is then a disposal at no gain, no loss so that the legatees acquire the assets at the date of and value at the date of death.

The big thing we used to look out for in my day is the executors having to sell the property in order to pay the debts. In that case the legatees cannot get their hands on the property regardless of what the will may say.

http://www.hmrc.gov.uk/manuals/cgmanual/cg30770.htm

As ever, there are exceptions. I seem to recall a couple of cases on here recently where the will directed that the property be sold (by the executors) and the proceeds distributed to the legatees.

In those cases I cannot see any way in which beneficial ownership can pass to the legatees before sale even if the property is sold to them.

The other one that immediately springs to mind is something you seem to be fond of bringing up. That is that if the executors vest ownership in the legatees during the period of administration (i.e. in advance of the residue being ascertained).
http://www.hmrc.gov.uk/manuals/cgmanual/CG30750.htm
That is something I have never seen done in practice. I suppose it could be useful in some circumstances but I find it difficult to imagine what those circumstances might be.

John_Pierpoint

That sounds very reasonable and goes some way to explain the the muddle the accountant and solicitor seemed to create: The death of my grandmother was followed roughly a year later by the death of my indebted father. A classic case of an attempt at "clogs to clogs in three generations", but that was back in the swinging sixties.

I was also comparing the transfer of ownership at death, with the same transfer of ownership to a spouse, conveniently just before the disposal of an asset (eg a property). Several posters have claimed that this tax planning is under attack from HMRC and it is advisable to split the ownership in the tax year prior to the sale.
At death the same could be achieved with a deed of variation of the will, rather than a gift from the beneficiary.

John_Pierpoint

bump - Fixing probate valuation for beneficiaries with HMRC - jimmo advises