Capital Gains Tax During Estate Administration

Capital Gains Tax for Executors

The law on Capital Gains Tax (CGT) during Estate administration is often misunderstood. In many ways, the position between sales by living persons and by executors are similar but are often subtly but importantly different. They can easily catch you out!

Free uplift

Many non-professional Executors believe that CGT is based on the price at which the deceased bought an asset. This can make people concerned when the deceased bought their house many decades ago and it has increased in value several times over.

However, there is a free uplift of CGT on death to the date of death value. This means that when the Executors sell an asset, they only need to look at the difference in value between the date of death and the date of sale.

Main residence

When someone sells their main residence during their lifetime, they can usually claim Principal Private Residence Relief (PPRR). This means that any increase in value since the purchase is not taken into account when they calculate the gains on the rest of their asset sales from that tax year.

The position on death is different. PPRR is only available for Executors when the house was the main residence of at least one individual immediately before and immediately after the death. The individual(s) must also be entitled to at least 75% of the sale proceeds, whether from the Will or otherwise. In practice, therefore, PPRR will only be available on death when the deceased was living with someone else.

Where PPRR is not available, Executors must submit a provisional return of the estimated gain and pay any tax due within 60 days of completion.

Allowable expenses

As with sales during lifetime, the Estate can deduct the incidental expenses incurred in selling an asset, such as mortgage redemption, estate agent’s fees, broker fees and conveyancing fees. This ensures that it is only the net gain that is taxable.

In addition, if you have solicitors acting in the Estate administration, you can deduct a portion of their fees. These are calculated in different ways depending on the value of the asset.

Annual exemption

The annual exempt amount for estates is the same as for living individuals, and double the amount for most types of trusts. As of tax year 2024/25 it is £3,000, which is much lower than in previous tax years.

The exemption is only available in the tax year containing the date of death and the two immediately thereafter. If there are assets that have still not been sold after that, the exemption is lost!

Appropriation

This can be a powerful way to wash out a large capital gain in Estates which have multiple beneficiaries.

The basic position is that the Estate only has one CGT annual exemption. This amount is much lower than it has been in previous tax years. If assets have sold for much more than this, there could be a substantial tax bill.

To alleviate this, the Executors can choose to “appropriate” the asset before it is sold: this means that instead of being sold by the Estate, it is treated as if it were sold by the beneficiaries. As a result, all the beneficiaries can use their own CGT allowances and the Estate can still use its own one. Therefore, in an Estate with three residuary beneficiaries, the gain can be split across four CGT allowances, i.e. one for each beneficiary plus one for the estate!

Tax returns

Depending on the circumstances, the executors may need to file a tax return. This includes Estates in which any of the following conditions apply:

• The total sale proceeds are more than 4 times the annual allowance
• The will contains a trust
• The total income tax and CGT liability for the administration period is over £10,000
• The probate value of the Estate is over £2.5 million
• The Executors sold assets in any one tax year for more than £500,000 (or £250,000 where the date of death was before 6 April 2016)

If none of these applies, the Executors may be able to make an informal payment to HMRC for the whole administration period.

Conclusion

Capital gains tax for Executors can be a minefield with all of its quirks and differences compared to how living individuals are treated. It is therefore essential for Executors to take proper advice on the CGT implications of a proposed sale, especially where the value has increased substantially since the date of death.

For further advice and assistance please contact our Wills, Trusts and Probate team on 01604 828282 / 01908 660966 or email [email protected].