An error on inherited property value leads to owing CGT

dastep

My father-in-law passed away in June 2014 and left an estate worth approximately £200,000 to his three children. The estate consisted of cash and a flat that sold in October for £140,000. Probate is now closed and money is about to be paid out to the benefactors of the will.

My brother-in-law is the executor of the will and had two estate agents come value the property in 2014. The probate company hired one estate agent to value the property and my brother-in-law asked another estate agent for a second valuation.

The flat was estimated accurately at £140,00 by the first estate agent, but he never submitted a formal estimate, and the second estimate came in very low at £115,000 because the estate agents was concerned that the property would have problems selling because it needed the leasehold renewed.

Unfortunatley, because my brother-in-law was a bit too impatient and didn't wait for the second valuation of £140,000, the probate solicitor used the lower figure to value the property and start probate rolling.

The solicitor warned my brother-in-law later that if the property sold for more than the value that was initially submitted then CGT would have to be paid by the estate, but by the time it was mentioned, it was already in process and couldn't be changed or amended.

Because the selling price is much higher than the value of the property that was submitted, the solicitor is telling the families that we all owe capital gains tax to HMRC.

Technically, there shouldn't have been any CGT paid if the whole job had been done right, but is there a way for us to recoup that CGT with HMRC even though everything is now finished?

dzug1

It's arguable that your BiL is liable to the estate for the loss due to his failure to heed advice


Whether you'd want to press this is another matter


Pass on the HMRC question

CLAPTON

you can submit another valuation for the property but HMRC may challenge it

SeniorSam

It really depends on how long after submitting the lower valuation, you were advised about the possibility of CGT. It is surprising that the solicitors did not ask for at least a second valuation before proceeding however the time delay between then and sale date would possibly suggest an increased value.

If the tax has to be paid then it is paid from the Trust, before distribution.

Sam

kidmugsy

The fact that it sold for £140k in October implies that its value must have been close to £140k in June. In which case Clapton's suggestion seems pretty good to me.

getmore4less

this has come up a few times over thlast few days, nothing you can do about the IHT side of things nothing to pay so HMRC have no interest.

What has been said by others is you have to get a new valuation accepted for CGT purposes suposedly the form you need is CG34.
https://www.gov.uk/government/publications/sav-post-transaction-valuation-checks-for-capital-gains-cg34


(bit silly on the probate forms with estates well within IHT you err on the high side).

wyliam

My father-in-law passed away in June 2014 and left an estate worth approximately £200,000 to his three children. The estate consisted of cash and a flat

I must have missed something here. The flat was within the estate and therefore disposed as per the Will. IHT would be charged on the whole estate including the flat (at whatever valuation was given).

If the Will said the flat was to be sold, then the receipts of the sale would become part of the Estate. If the flat achieved a higher price than had been entered into probate, then additional IHT could be due. This must be paid out of the Estate.

If the Will said that the flat was to be given to someone or more than one person, then the executor must do that. The cost of transferring ownership must be met out of the Estate. If the flat is subsequently sold then the owner(s) could be liable for CGT on any increase in value between when it was received and when it was sold.

I fail to see how CGT could possible be due from the Estate.

MichelleUK

wyliam wrote: »

I must have missed something here. The flat was within the estate and therefore disposed as per the Will. IHT would be charged on the whole estate including the flat (at whatever valuation was given).

If the Will said the flat was to be sold, then the receipts of the sale would become part of the Estate. If the flat achieved a higher price than had been entered into probate, then additional IHT could be due. This must be paid out of the Estate.

If the Will said that the flat was to be given to someone or more than one person, then the executor must do that. The cost of transferring ownership must be met out of the Estate. If the flat is subsequently sold then the owner(s) could be liable for CGT on any increase in value between when it was received and when it was sold.

I fail to see how CGT could possible be due from the Estate.

The estate would not be subject to IHT as it is below the nil rate band of £325,000. Any gain from the the sale of the house, less allowable costs, less its market value at the date of death is subject to CGT (less any annual CGT allowance)

wyliam

Thanks MichelleUK;
I cannot see from the information given; who it is that made the capital gain. Is it the deceased's estate or is it the beneficiaries?
If it is the three beneficiaries, then their combined Annual Exempt Amount is 3 x £11,000 which exceeds the £25,000 (less expenses) capital gain. Hence no CGT to pay.

Keep_pedalling

wyliam wrote: »

Thanks MichelleUK;
I cannot see from the information given; who it is that made the capital gain. Is it the deceased's estate or is it the beneficiaries?
If it is the three beneficiaries, then their combined Annual Exempt Amount is 3 x £11,000 which exceeds the £25,000 (less expenses) capital gain. Hence no CGT to pay.

Not under normal procedures where the estate has it's own allowance and CGT is paid by the estate before full distribution of the gifts to the beneficeries is completed.

dastep

MichelleUK wrote: »

The estate would not be subject to IHT as it is below the nil rate band of £325,000. Any gain from the the sale of the house, less allowable costs, less its market value at the date of death is subject to CGT (less any annual CGT allowance)

Michelle,

I certainly understand why HMRC would expect CGT if the property was held by the estate for a length of time and a higher price was realised once the sale was completed.

However, the problem in our case is that a low value was given that should not have been registered in the first place due to the estate agent not having a correct grasp on the value of the property due to its' lease needing upgrading and not knowing exactly how much it would take to bring a 57 year lease up to 100 years to satisfy a potential buyer.

There was discussion when the flat was being valued about the cost to upgrade the lease which ranged from between £15,000 - £25,000 and that caused the estate agent to 'lowball' his estimate.

My father-in-law died on June 11th of 2014, and the home was valued, and put up for sale in October for £140,000 and sold a week later at that price. I met with both estate agents who gave me their estimates of £140,000 and £115,000.

The estate agent who gave us the £140,000 verbal estimate never submitted his written estimate and my brother-in-law sadly was too impatient to chase him for it not realising that submitting the £115,000 value to probate would make any difference since the estate was below the £325,000 threshold for IHT.

As a result, the £115,000 was filed to proceed quickly with probate knowing how long it would take to complete. It was later that my BIL was informed of the potential CGT that would have to be paid as the home was immediately sold for $140,000.

I totally and completely understand why HMRC would expect CGT if there was a legitimate increase in profits to the estate as the result of market fluctuations, but in our case it was error on the part of a person who was not fully informed of the seriousness of not submitting the proper estimate and its' consequences.

My question is: There is nothing that can be done to reverse the error, and money from the estate has already been paid out. Can we still submit documents to HMRC for the purpose of getting a refund of CGT if they also agree that an error was made with the initial estimate of the property?

Sadly, there probably isn't anything that can be done and perhaps the error falls upon the shoulders of the solicitor who was neglectful in not informing my BIL about the seriousness of making sure a proper property valuation was made once probate was submitted.

Perhaps there will be someone else who comes across this blog who might learn from our mistakes and save themselves the pain of paying CGT when it shouldn't have been paid?