Capital Gains Tax, inheritance and the valuation trap for executors

With recent changes to Capital Gains Tax (CGT), we are receiving more and more calls from worried executors who have only become aware of CGT issues after a property sale has completed. At completion, the clock starts ticking on the 60 day CGT deadline to report the sale and pay the tax to HMRC. The purpose of this article is to provide an overview – and highlight some of the pitfalls – of Capital Gains Tax for executors.

Many of us will have had little reason to consider CGT. It is, in simple terms, a tax paid when we sell or gift assets, such as property or investments, at a value more than they were worth when bought or acquired – this difference is known as a capital gain and CGT is charged at up to 28%.

Why haven’t I been affected by CGT before?

Why then, do so many people go through life without paying any CGT? There are several reasons. When most of us sell the property we live in, there is no CGT to pay because the sale of your home qualifies for 100% relief from CGT. If an investment is sold when held in a pension or ISA, any gains are exempt from Capital Gains Tax. Also, until 06 April 2023, there was a £12,300 allowance (called the annual exempt amount) for capital gains that could be made by an individual each year before CGT became payable.

Together, these and other reliefs, exemptions and allowances, meant that CGT could be seen in the past as a tax paid only by the well-heeled or ill-advised. Whilst this was never strictly true, recent changes mean that many more of us will become liable to pay CGT in the future. The annual exempt amount was reduced to £6,000 from 06 April 2023 and a further reduction to £3,000 will take effect from 06 April 2024. The effects are already being widely felt.

Reporting value of assets to HMRC

For many, their first encounter with CGT will be when they sell a property as an executor. Before that sale can take place, when applying for probate, an executor needs to report to HMRC the value of the assets and liabilities of the person who has died.

At this stage, executors will often be sharply focused on the issue of inheritance tax and not consider that the value used will form the basis of a future CGT assessment. This is because the value of the property at the date of death is treated as the price at which the executors acquired the property for CGT purposes. Executors who are unaware of this tend to declare a value at the lower end of expectations even when there is no inheritance tax payable. This in turn will increase the likelihood of the property being sold at a gain in the future.

Now that CGT is payable on gains over £6,000 and in 2024-25, £3,000, the need for valuations to be accurate has never been more important and valuation advice from an expert such as a chartered surveyor may be the best way to ensure that the chance of error is minimised. It is important to ensure that the instructions to the valuer are in the correct form. This will give the best chance of defending any future challenge from HMRC, which may seek to argue a lower valuation should be used when CGT is at stake.

Seek advice before exchange of contracts

In certain circumstances, such as a rising property market or when property is improved before sale, some capital gains may be unavoidable. But this does not mean that CGT is unavoidable. Here, it is essential to understand that an executor must take action before the exchange of contracts and use the correct legal documents.

In this way, a gain may be divided amongst several individuals, all of whom may have their own annual exempt amount to use against their share of the gain. For example, this could allow an estate where there are three married siblings inheriting a property to reduce a CGT liability by up to £10,080 in the 2023-24 tax year. In many cases, this will mean no CGT may be payable at all in circumstances where there would otherwise have been a liability. Executors should also be aware that a failure to explore options for reducing CGT liability may leave them exposed to claims from disappointed beneficiaries.

The key point to remember is that executors need good advice at the outset before applying for probate and before exchanging contracts to sell property. By doing so they can avoid being saddled with a CGT liability that could have been minimised or avoided altogether.

Please note that this information is for general guidance only and should not substitute professional legal advice. If you have specific concerns, we recommend consulting with one of our legal experts.