ISA and general investment account, CGT position

Section62

I'd be grateful for a sanity check as a friend is asking me for help as they have had conflicting advice from professionals.

The deceased had investments in a stocks and shares ISA, along with investments in a general (non-ISA) account.

AIUI as the death was within the last 3 years the investments in the ISA have continued to benefit from the ISA and the gains (not insignificant) won't be subject to CGT, so far.

The ISA provider has apparently offered two options: 1) Selling the investments and transferring the proceeds to the executors to pass on to the beneficiary, or 2) Transfering the investments in-specie to an account in the beneficiary's name.  The relationship between the deceased and beneficiary means APS isn't a factor.  It also appears there is a third option that the investments are sold to cash first, then transferred by the provider direct to the beneficiary's account with the provider.  As APS doesn't apply the account the beneficiary would use would be a general investment one, not an ISA.

The beneficiary believes there would be no CGT to be paid by the estate regardless of which option is chosen, they think whether the investments are transferred in cash or in-specie makes no difference as for their own CGT purposes the in-specie transfers would have a base cost of the value on the date of transfer.

A second beneficiary (who gets nothing from the investments) is making a fuss because they claim they've been advised the gains since death are subject to CGT which will fall on the estate (and affect the residual).  And furthermore, if the first beneficiary takes the investments in-specie (which the second beneficiary is saying they should do to avoid CGT liability on the estate) then the first beneficiary will be liable for CGT when they sell with the cost basis being the value at date of death.

I suspect the 'advice' the second beneficiary got was from reading outdated comments on the internet when the rules were different... but before agreeing with the first beneficiary I'd be more comfortable if others here think the same.  Just in case I've missed something.

Many thanks.

poseidon1

Starting with general 1st principles related to in specie transfers of assets to beneficiaries, no CGT accrues to the estate regardless of increase in value during the administration period - see below

https://www.gov.uk/government/publications/death-personal-representatives-and-legatees-hs282-self-assessment-helpsheet/hs282-death-personal-representatives-and-legatees-2024#transfer-of-assets-to-legatees

That general principle also applies to ISA shares, no CGT on the estate whether transferred to beneficiaries  before or after the 3 year exemption period.  However in order for a beneficiary to receive a personal tax benefit from the ISA exemption over the three year period,  there is a departure from the usual rule of acquiring at value at date of death and instead they acquire ISA shares at market value on date of transfer - following article explains - 

https://www.charles-stanley.co.uk/insights/commentary/what-happens-your-isa-when-you-die#:~:text=The exemption lasts for a,year anniversary, whichever comes first.

Therefore having regard to 1st principles, the 2nd beneficiary is wrong on pretty much all counts. The only situation where the estate could face a CGT charge on ISA shares is an estate sale after the expiry of the 3 years and even then the gain is measured by reference to market value at the end of the third year.

In the situation you outline, in specie transfers of assets will  nearly always be the appropriate course of action if avoidance of CGT ( at estate level) is considered paramount above all other factors.

Section62

poseidon1 said:

...The only situation where the estate could face a CGT charge on ISA shares is an estate sale after the expiry of the 3 years and even then the gain is measured by reference to market value at the end of the third year.

In the situation you outline, in specie transfers of assets will  nearly always be the appropriate course of action if avoidance of CGT ( at estate level) is considered paramount above all other factors.

Thank you for the clarification.  So in relation to the ISA there is no difference between selling the assets or transferring them in-specie, provided this is done before the 3 years is up?

poseidon1

Section62 said:

poseidon1 said:

...The only situation where the estate could face a CGT charge on ISA shares is an estate sale after the expiry of the 3 years and even then the gain is measured by reference to market value at the end of the third year.

In the situation you outline, in specie transfers of assets will  nearly always be the appropriate course of action if avoidance of CGT ( at estate level) is considered paramount above all other factors.

Thank you for the clarification.  So in relation to the ISA there is no difference between selling the assets or transferring them in-specie, provided this is done before the 3 years is up?

Correct, as far as the estate is concerned.

Keep_pedalling

poseidon1 said:

Section62 said:

poseidon1 said:

...The only situation where the estate could face a CGT charge on ISA shares is an estate sale after the expiry of the 3 years and even then the gain is measured by reference to market value at the end of the third year.

In the situation you outline, in specie transfers of assets will  nearly always be the appropriate course of action if avoidance of CGT ( at estate level) is considered paramount above all other factors.

Thank you for the clarification.  So in relation to the ISA there is no difference between selling the assets or transferring them in-specie, provided this is done before the 3 years is up?

Correct, as far as the estate is concerned.

But I don’t think that is the case with the beneficiary. If the equities are transferred to the beneficiary then sold the CGC will be based on the valuation at the time of death not the time of transfer. I would have thought it better for them to have the assets liquidated and take their inheritance in cash. 

Daniel54

Speaking from experience,executors can find themselves in an awkward position when the estate contains investment portfolios of significant size - in this case the amounts are unknown.The difficulty arises from the situation that the executors are effectively taking investment risk on behalf of beneficiaries.In this case it appears that to date there have been gains,but there is of course no guarantee these might not be reversed next week - no one knows.

I would suggest the executors go no further than liquidating the S&S investments in both the ISA ( no CGT ) and the GIA ,the estate paying any tax,if applicable.

Distributing the estate in cash is the only way I would choose to go as an executor in these circumstances

poseidon1

Keep_pedalling said:

poseidon1 said:

Section62 said:

poseidon1 said:

...The only situation where the estate could face a CGT charge on ISA shares is an estate sale after the expiry of the 3 years and even then the gain is measured by reference to market value at the end of the third year.

In the situation you outline, in specie transfers of assets will  nearly always be the appropriate course of action if avoidance of CGT ( at estate level) is considered paramount above all other factors.

Thank you for the clarification.  So in relation to the ISA there is no difference between selling the assets or transferring them in-specie, provided this is done before the 3 years is up?

Correct, as far as the estate is concerned.

But I don’t think that is the case with the beneficiary. If the equities are transferred to the beneficiary then sold the CGC will be based on the valuation at the time of death not the time of transfer. I would have thought it better for them to have the assets liquidated and take their inheritance in cash. 

Yes I did say as far as the estate is concerned.

For a beneficiary, keeping within the 3 year period is important for them to avoid CGT on sale or transfer in specie.

As indicated by Daniel54, this can mean a bit of balancing act to be performed by the executors and  for them to be ever  cognizant of what is happening with the investment portfolio ( gains or losses) whilst keeping an eye on the expiring  3 year period to achieve optimum outcomes for the beneficiaries concerned. This does require research for them  to understand the opportunities and  possibilities.

Personally, I would want my executor to maximise post death CGT free  investment returns by way of  judicious use of available reliefs, especially since trusts will be emerging from the residue of my estate (IHT will be significant).