Capital Gains on inherited investment?

Megadyne

As Power of Attorney for my mother's affairs I am filing her self-assesssment form 2013-2014 and I'm not sure what, if anything, I should do about the sale (during 2013-2014) of some investments she had.

Sorry, it's turned out to be a longish post, but I'm trying to be very clear about the situation.

Around 20 years ago my parents down-sized their house and Dad invested the balance with Barclays Investments. He died in 2002 and Mum inherited the investments. In 2009 she was diagnosed with Alzheimer's and my sister and I took over her affairs as Attorneys.

Unfortunately she had not been very rigorous in keeping records (I think at first she just wanted to get rid of reminders of Dad's death) and we only have records of the investments going back to 2005 when they were worth about £67k. I think it's very likely that she inherited about £65k but have no evidence to prove it.

The investments seem to have changed nature quite a lot of the years but on the sale they were in the form of shares in an 'Open Ended Investment Scheme' (or words to that effect). Some part of this seems to have been an ISA but it's not clear to me what the ISA amount was, or even how it worked.

In March this year we decided to sell the investments to continue paying for her residential care home costs and they realised just under £72k (having bounced up and down a bit through 2007 - 2010!). Interest earned on the investments has not been re-invested but taken out as income.

So, we don't know:

- how much Dad invested in 199X;
- exactly how much she inherited in 2002.

On filling in the SA tax return it occurred to me that maybe this sale is liable for CGT or at least should be declared even if the amount of gain is likely to be less than the personal CGT allowance.

So, these are the questions I am struggling to answer:

(1) Do I need to declare this on the SA tax return? If so, what do I put as the 'Capital Gain'? Is the 'Capital Gain' the difference between the sale price and the sum originally invested by Dad some 20 years ago, or between the sale price and the amount Mum inherited 12 years ago?

(2) Would the fact that at least some of the investment has been in an ISA make a difference?

Any advice or suggestions would be very welcome. Thanks.

kidmugsy

Megadyne wrote: »

Would the fact that at least some of the investment has been in an ISA make a difference?

No expert, but I believe that the value for CGT purposes is the valuation when the ISA ends i.e. at the holder's death.

bowlhead99

Megadyne wrote: »

(1) Do I need to declare this on the SA tax return? If so, what do I put as the 'Capital Gain'? Is the 'Capital Gain' the difference between the sale price and the sum originally invested by Dad some 20 years ago, or between the sale price and the amount Mum inherited 12 years ago?

(2) Would the fact that at least some of the investment has been in an ISA make a difference?

You should look into the sale paperwork in more detail to try to establish what was in an ISA and what wasn't. If your dad's investments way back in the day included ISAs they would have lost that status when he died, but potentially your mother contributed to her own ISAs over the years (i.e., after they down sized it would have made sense for him to invest some of the proceeds in his own ISA allowance and some in hers, to use both annual allowances), and she may or may not have made some more contributions after he died.

So, it's perfectly possible that a portion of what you cashed in, was an investment fund (Open Ended Investment Company or 'OEIC') wrapped up in an ISA, while another portion was just a normal investment fund with same or different name that was outside an ISA.

You should go back to the paperwork from March to try to establish this because the only things to declare on the SA tax return are things that happened outside an ISA. Barclays may be of assistance if you believe some of it was in an ISA and some not; if you have the account details they should be able to say if it was an ISA account or not.

So when you "cashed in" the 72k, if £22k was in an ISA and £50k outside an ISA, then only the £50k is relevant for any kind of reporting. That goes for any income received from it in the year that was taken and spent, and any capital gains tax that might need to be calculated on the sale. Anything that sat in an ISA wrapper is completely ignored for income or gains tax purposes and never reported.

So, on to what you do with the numbers for the assets that were outside the ISA. The rule for whether you have to declare the sale on your return is:

1) if the gain made is over the annual CGT allowance, declare it

2) if the total sales proceeds is 4x the annual allowance for 2013/14, even if the gain is less than the annual allowance, declare it (you wouldn't pay any tax but they want the information)

3) if it's a loss and you want to be able to get losses offset from gains she might make in the future, declare it

You can see from 2 that if actually only £30k of proceeds came from unwrapped shares or fund outside the ISA and the gains were within the limit, there is nothing to report. But if £50k of proceeds came from assets outside the ISA you should report the details (proceeds and costs), even if you don't actually have a gain that ends up needing any tax paid.

If your mum did receive all these unwrapped assets from your dad via inheritance, then the cost for CGT purposes is what they were worth when she inherited them in 2002. However if they were acquired in her own name back in 199x (or acquired by him in 199x and transferred into her name while he was still alive) then the relevant cost is whatever was originally paid for them in 199x.

If you have no way of knowing what was paid and you don't have any records of the value of assets she received in 2002, the only thing you can do is guess at the purchase costs. In the first few months of 2002 the UK 'FTSE 100' was at similar levels to what it was in late 2005. But the market went sharply downwards from about May 2002, and by the end of 2002 it was quite a bit lower. So potentially if he did not die until the end of 2002, the value of your fund could have feasibly been 20% lower when she inherited his assets than when your records began in, say, April 2005. You could perhaps research this if you know what fund the fund was called in 2005 and what date in 2002 she acquired it.

If you are guessing, I assume HMRC would like you to err on the side of estimating a lower cost and therefore a greater gain so you don't get away with avoiding gains taxes simply by playing dumb. If you ask them, I expect they will say you should not guess but make every effort to find out the proper figures by contacting the providers of the products, reviewing records from when probate was applied for, etc.

Megadyne

Bowlhead99, thank you! That is really so very helpful. Not only giving details, but suggestions for the next steps. You're a hero. Thanks again.