CGT exemptions

  • Author : Amanda Edwards
  • Date : August/September
ABOUT THE AUTHOR: Amanda Edwards TEP is an Associate in the Private Client and Tax department at Boodle Hatfield LLP

Jamie and Jenny are executors and sole beneficiaries in equal shares of their late Aunt Jessie’s will. Aunt Jessie died in October 2011. Her estate comprised mainly stock-market investments (GBP470,000) and cash, and had a gross value of GBP510,000. Administration costs are expected to be GBP10,000.

When Aunt Jessie died in October 2011, the stock market was in a slump, but by March 2011 the shares were showing gains of around GBP60,000.

The executors obtained the grant in early March 2012 and their solicitor, Mr Helpful, explained the capital gains tax (CGT) treatment of the investments:

1Executors acquire the shares of the deceased at a base cost equal to their market value at the date of death.2Executors are liable to CGT on any gains and disposals during the administration period. The normal CGT rules apply when calculating the gain.3Executors have an annual CGT exemption for the year of death and the next two tax years. This exemption is the same as the exemption for individuals: GBP10,600 in 2011/12, GBP10,600 in 2012/13 and GBP10,600 (assuming no change to the exemption in the Budget) in 2013/14.4For gains above the annual exemption, the executors pay CGT at 28 per cent (the same rate as trustees).5The costs of obtaining probate are, for the executors, allowable deductions for CGT purposes. On the sale of an asset, a proportion of these costs can be allocated to offset against the gain by the executors. HMRC allows relief to be claimed either for the actual, proportioned, costs of obtaining probate or for a fixed percentage laid down in HMRC’s Statement of Practice SP2/04, which sets out various scale rates.6Where executors distribute an asset to a beneficiary in settlement of their entitlement under the will, this is not a disposal for CGT purposes. The beneficiary acquires the asset at its value at the date of death.

As the gross value of Aunt Jessie's estate is between GBP500,001 and GBP1,000,000, the allowable costs under SP2/04 are 0.8 per cent of the probate value of the assets sold or the actual proportionate costs, whichever is higher.

Mr Helpful suggests that the GBP60,000 gain can be offset against either the annual CGT exemptions of the executors or those of the two beneficiaries. For the years 2011/12 and 2012/13 there are six exemptions of GBP10,600 available, totalling GBP63,600 (two GBP10,600 exemptions for the executors and four in total for the two beneficiaries). The administration is expected to continue into the tax year 2013/14. Mr Helpful explains how these exemptions can best be used.

Executors’ annual CGT exemptions

Mr Helpful first identifies those shares that can be sold by the executors before 6 April 2012 where the gains will be covered by the annual CGT exemption and the cost of obtaining title to the assets (see table below). The sale proceeds of the shares selected are GBP212,000, with a base cost (as at the date of death) of GBP200,000, producing gains of GBP12,000.

 

He carries out a similar exercise after 6 April 2012 to use the executors’ annual CGT exemption for 2012/13, again identifying shares with gains that will be covered by the annual CGT exemption and the cost of obtaining title.

Beneficiaries’ annual CGT exemptions

Mr Helpful suggests the executors first appropriate shares to themselves as beneficiaries to use their personal annual exemptions of GBP10,600 each for 2011/12, then again, after 5 April 2012, to use their exemptions for 2012/13. The shares are then sold by Jamie and Jenny, who are left with some of their CGT exemption for each year. The beneficiaries cannot benefit from any reduction from the costs of obtaining probate.

The result is that the executors and beneficiaries have eliminated the CGT liability that would have arisen had they simply sold all the shares as executors without any planning and paid 28 per cent on the gains above the annual CGT exemption in the year of sale.

This is a regular column supporting the STEP Diploma in Trusts and Estates (England and Wales) syllabus. For more on this and other STEP qualifications, go to www.step.org/pd


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