CGT tax for the slow witted...

izaac

... Like me!

As some of you might recall from a couple of earlier posts we are in the process of valuing mum's house for Probate, and CGT purposes.

There are 4 beneficiaries, two get 2/5ths each, two share 1/5th of the estate.

I have been told the estate gets an annual allowance of about £10600 for CGT purposes; and alternatively- or additionally??- I've also been told each beneficiary, including children get a CGT allowance.

So, if the house sells for rather more than we reckon it's worth, is the first £10,600 exempt; the first £42,400 exempt (4 times the allowance); or the first £53,000 (the 4 beneficiaries plus the Estate's allowance)?

We are wondering how much in knots we should be tying ourselves about 'the precise value' as it is a difficult property to value (3 agents have varied by £70,000 so far!).

Thanks

SeniorSam

Hello again izaac,

CGT does not enter into the calculations in the selling of your mother's home by the executors and this has been clarified to you in earlier posts.

You have also been told that the total value of your mother's estate is what will be looked at and if over the nil rate band allowance of youy parents, who have each an allowance of £325,000, inheritance tax wil be charged on the balance at 40%.

You have already explained that the value of the estate will not reach that figure, so taxes do not enter into the calculations, unless any eartlier information has changed.

You may be getting confused, possibly by the amount of questions and answers you are involved with on these forums and not keeping them on the same thread. Do however ask for further clarification if needed, but refer back to the information you have already received over the last week or so.

Sam

izaac

Sam; with respect, you seem to be getting confused between IHT and CGT.

I 'get' that our IHT threshold is what, £610,00. The estate, as already mentioned, is worth about £500,000

You tell me: "CGT does not enter into the calculations in the selling of your mother's home by the executors and this has been clarified to you in earlier posts."

I am both an executor and a beneficiary, as mentioned.

But if we undervalue the house, we can be accused of negligence (especially if we were on the IHT threshold!) and we get hit for CGT; if we overvalue it too much, it looks like an attempt to avoid CGT.

And "Next is to consider who the property will be passed to. If this is a single beneficiary, then the difference between the property probate value and sale price, if higher, may attract CGT. Each person has a CGT allowance, so it will not be taxable until that allowance, or allowances have been exceeded that capital gains tax would be payable."

-which implies to me that CGT does enter into house sale calculations! (Someone on here advised me to value the house on the upper side to minimise CGT, actually, as IHT isn't an issue).

Now I'm just asking for clarification of our CGT position.

Clapton tells me: "cgt is based on your gain
so if there was a net gain of say 50,000
then your share would be 50,000 x 2/5 = 20,000
your cgt allowance would be 11,000 this year 11,100 after 6th april 2015
so tax would be 18% or 28% (depending upon your income ) x 8,900
so between 1,602 and 2,492"

Can I, or any of the other beneficiaries really claim 2 lots of CGT 'relief' seeing as we'll sell the property only once, in one tax year? I cannot believe the HMRC would allow us to add 2 years of CGT relief together, apiece- or do they if the time of death to house sale time spans the boundary of 2 tax years?

Thanks.

I am merely trying to do a mental risk assessment deciding on how much blood, sweat and tears to put into the house valuation- what 'the hit' will be if we miscalculate, and bearing in mind the house isn't the only'asset' but is the one of greatest value, of course.

CLAPTON

izaac wrote: »

Sam; with respect, you seem to be getting confused between IHT and CGT.

I 'get' that our IHT threshold is what, £610,00. The estate, as already mentioned, is worth about £500,000

You tell me: "CGT does not enter into the calculations in the selling of your mother's home by the executors and this has been clarified to you in earlier posts."

I am both an executor and a beneficiary, as mentioned.

But if we undervalue the house, we can be accused of negligence (especially if we were on the IHT threshold!) and we get hit for CGT; if we overvalue it too much, it looks like an attempt to avoid CGT.

And "Next is to consider who the property will be passed to. If this is a single beneficiary, then the difference between the property probate value and sale price, if higher, may attract CGT. Each person has a CGT allowance, so it will not be taxable until that allowance, or allowances have been exceeded that capital gains tax would be payable."

-which implies to me that CGT does enter into house sale calculations! (Someone on here advised me to value the house on the upper side to minimise CGT, actually, as IHT isn't an issue).

Now I'm just asking for clarification of our CGT position.

Clapton tells me: "cgt is based on your gain
so if there was a net gain of say 50,000
then your share would be 50,000 x 2/5 = 20,000
your cgt allowance would be 11,000 this year 11,100 after 6th april 2015
so tax would be 18% or 28% (depending upon your income ) x 8,900
so between 1,602 and 2,492"

Can I, or any of the other beneficiaries really claim 2 lots of CGT 'relief' seeing as we'll sell the property only once, in one tax year? I cannot believe the HMRC would allow us to add 2 years of CGT relief together, apiece- or do they if the time of death to house sale time spans the boundary of 2 tax years?

Thanks.

I am merely trying to do a mental risk assessment deciding on how much blood, sweat and tears to put into the house valuation- what 'the hit' will be if we miscalculate, and bearing in mind the house isn't the only'asset' but is the one of greatest value, of course.

it is one hundred percent normal and everyday for each person to have their own tax allowance for cgt

so if two (or more ) people jointly own a house (say rented out) and come to sell ; then the cgt will be calculated on each persons share: so no question that two (or more) cgt allowances are offset against the total gain.

the only issue in your case is I'm not 100% sure about the executor selling the property rather than the beneficiaries.
HMRC are NOT allowing two years worth of relief but they are allowing two (or more) joint owners to each have their own cgt allowance offset against their share of the gain.

your IHT allowance is 650,000

if you value the house correctly, then the only capital gain will be between the time of death and the time of sale : usually this would be zero unless there is high house price inflation in your area and there is a long period between the death and the sale

booksurr

if you do not understand what is meant by the sentence " the executors are selling as bare trustees for the beneficiaries" then it is time you handed over your executorship to professionals who do...

izaac

Could you explain that remark, booksurr?

I have explained in my second post that "I am both an executor and a beneficiary, as mentioned."

The two roles are separate. Have I misused terminology somewhere that has confused the issue? If you'd trawled all my other posts on the matter of my mother's death and me being an executor and beneficiary and found that remark, you'd also know I was an executor and beneficiary!

I recognise that the Estate incurs IHT, were it large enough, which is paid out of Estate monies. I also now recognise (thanks Clapton) that each beneficiary gets a personal CGT relief; my post was clarifying how much relief, overall, the benefactors can enjoy, should the house be significantly undervalued. This must be paid before Estate distribution.
I get that.

I also, on another post; and yes, there have been several as I understand 'mission creep' isn't appreciated on MSE forums, asked about bare Trusts where 2 of the beneficiaries are under 18.

So I am at a bit of a loss to understand your apparent attack.

Clapton: Apparently, executors with Probate can sell houses, transferring the title from the deceased to the new owner.

SeniorSam

To repeat what I and others have said, the IHT allowance is in total £650,000, (both allowances of £325,000) so no IHT.

The executors could sell the property in the Discetionary Trust and pass the proceeds to the beneficiaries and if the value varies from what is given to the Revenue, the executors notify the Revenue to correct the figures, unless they have decided to hold on to it for some reason until a later date. If the figure is up or down, it matters not as far as IHT is concerned.

As far as CGT goes, when the house is sold by the Executors, the sale can only be completed once Probate has been granted and the executors inform the and Registry by completing the required forms.

The value has been given to the Revenue APPROXIMATELY according to Estate Agents Valuation for Probate and shoud this vary upon sale, adjusted if necessary. The Revenue are aware that you do not have a crystall ball and that the actual value is onl;y what someone is prepared to buy for, so often these figures are adjusted.

Sale made at valuation or adjusted sale price .........NO CGT.

Now if you want to make it more difficult for yourselves, then transfer the property to the beneficiaries as soon as Probate has been granted, by registering the property as tenants in common in the proportions according to the Will. Each beneficiary will then own their individual proportion. When the property sells, if the sale price differs by more that each beneficiaries personal CGT allowance, they each beneficiary will pay their own CGT.

I do hope that is clear for you this time, but I have gone as far as I can with this. Good luck

Sam

pathtofreedom

I'm sorry for your loss. You do seem a bit confused, and it doesn't sound like you need to pay capital gains.

There are two options you have. Only option 2 means you *might* pay capital gains.

1. sell the house straight away as part of the estate, and don't change it out of your mums name and into the 4 peoples names to do that. That would mean it would only come under the Inheritance tax rules, which it sounds like you wouldn't have to pay anyway, and you just split the money up tax free.

2. get the house valued but don't sell it. Change the ownership of the house to belong to the 4 people instead of your mum, and rent the house out. In 5 -10 years sell it, the difference between the price today and the 5 years time is the profit. On that profit you split between the 4 people, and that profit in the 5 -10 years by house prices rises is what the captial gains is valuled against.

With 4 people it might be more fiddly than that if one wants to live in the house, and the others don't get paid rent etc etc but that just needs advice from a solicitor / estate planner for the 4 new people as to how best cope with that as if one of those people die what will happen etc etc.

xylophone

how much relief, overall, the benefactors can enjoy,

You mean beneficiaries

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/323671/hs282.pdf

Does the above help?

You are getting very exercised over the value of the house - try RICS
surveyor?

http://www.step.org/probate-valuation

izaac

Thank you Sam.

Surely the IHT value is mum's, £325k; plus dad's unused (late April 2006) of £285k = £610k? I use IHT217 to tell HMRC about this.

Where do Discretionary Trusts come into it? Genuine question.

Pathtofreedom (thanks, too): I admit that the whole CGT thing has confused me.

Shortly after mum's death, a bloke from Barclay (subcontracted) came out to see us and told us that if we valued the house for less, on IHT205, than it eventually sold for, we'd be hit for CGT on the difference.

He didn't say (and I genuinely haven't read anywhere) that if we sell the house as presumably Probated executors straight to a new buyer, no CGT is payable. I'd imagine there are time limits on that? We have to register the House with the Land Registry before we could transfer ownership, and need Probate to be allowed to do that so we're looking at at least a couple of months. Though 'time' won't change the value, it's the hard-to-measure redevelopment potential of the house and plot that might!

I was not aware that I can make an adjustment to the 'value' of the house after I have cited its judged value when applying for Probate. My understanding from all my reading has been, that the value of the house as stated for Probate valuation was what any CGT payable was based on, in particular if the house sells for more than our cited value, and I haven't anywhere official seen that HMRC make allowances for 'crystal ball' guesses, basing the CGT owed on 'adjusted values'! But this apparently doesn't apply if we sell as executors.

So really, a 'ball-park figure', the average of 3 back-of-an-envelope EA valuations is going to be fine as it doesn't 'matter' if we get it a bit wrong, is that right?

But why worry about the 5 x beneficiaries CGT exemptions if there won't be any CGT payable? (bearing in mind other than the house, nothing in the estate is gaining any value!).

As an aside, the guidance notes for IHT205 state:

"...If, having arrived at your (open market value) figure and before you apply for a grant (i.e. Probate), you find out about other information that casts doubt on your figure, you must reconsider it. For example, you may have estimated that the property was worth £250,000.
When you try to sell it you market it at £270,000 and receive some offers at that figure or more. This suggests that the open market value for the property may be closer to £270,000. In these circumstances we recommend that you ask the valuer to consider amending the valuation, taking into account such things as the length of time since the death and movements in the property market."

This doesn't suggest I can vary it after applying, however, it does suggest we should market a house we're not yet entitled to sell (being pre-Probate and non Land Registered!) in order to get a feel for the market!

IS this what everyone does?? As a potential buyer (or EA!) I wouldn't be impressed!

Mojisola

izaac wrote: »

Shortly after mum's death, a bloke from Barclay (subcontracted) came out to see us and told us that if we valued the house for less, on IHT205, than it eventually sold for, we'd be hit for CGT on the difference.

He didn't say (and I genuinely haven't read anywhere) that if we sell the house as presumably Probated executors straight to a new buyer, no CGT is payable.

He was wrong.