How is Capital Gains Tax charged on death?

Posted on By Joanna Pegum
man thoughtful by sea

When someone dies their estate is valued for probate purposes before being distributed to the person’s heirs. It is then potentially subject to Inheritance Tax (IHT), but is generally exempt from Capital Gains Tax (CGT); the rationale being that the same assets cannot be subject to both capital taxes. The beneficiary is treated as if they acquired the asset at its probate value. This is known as the CGT tax-free uplift on death.

It may be tempting for executors to down-value assets such as property, with a view to reducing the IHT bill, but this will only reduce the base cost of the asset, and potentially increase any CGT liability, so this needs to be considered.

Who should realise the capital gains – the estate or the beneficiaries?

Often the executors will sell some or all the assets, and then distribute the cash to the beneficiaries. In this case it is the executors who make any post-death gains/losses, so they will be responsible for formally registering the estate with HM Revenue & Customs and reporting any capital gains.

In respect of residential property disposals, it may also be necessary for the executors to complete an online 60-day capital gains tax return to report and pay any CGT due within 60 days of the date of completion of any property sale. The disposal will also need to be declared on any formal estate tax return which may be issued.

The executors are able to claim the full annual CGT exemption, currently £6,000 for 2023/24, reducing to £3,000 from 6 April 2024. The annual CGT exemption is available to the executors in the year of death and in the two following tax years. Any chargeable gains are subject to CGT at the higher rate, which is 28% for residential properties and 20% for all other chargeable assets.

There can however be some tax planning opportunities if assets are transferred to beneficiaries before they are sold. The beneficiaries can stagger the sales of assets over different tax years, and possibly claim multiple annual CGT exemptions. They can also utilise any personal capital losses they may have brought forward, and potentially pay tax at a lower rate than the executors, if any of the gains fall within their basic rate band, so they would pay tax at 10/18% instead of 20/28%.

What about the deceased’s CGT position in the year of death?

While CGT liabilities die with you, what about assets that the deceased has already disposed of in the tax year in which they die?

Any capital gains have to be disclosed on the deceased’s tax return for the period from 6 April to the date of their death, and they are entitled to a full annual CGT exemption.

Capital losses in the period to the date of death are automatically offset against any capital gains. Any capital losses brought forward can be offset, as long as any chargeable gains exceed the annual CGT exemption.

Any unused capital losses still remaining can be carried back and offset against any capital gains the deceased may have realised in the three tax years prior to the tax year of death. The losses must however be offset against gains in a later year, before setting them off against gains from an earlier year.

Katie Buckley is a Director of The Tax Angel Consultancy Limited

What do I do if I have concerns about the attorney or deputy managing my friend or relative’s affairs?

Posted on By Joanna Pegum
pensive woman

There a number of circumstances where you might become concerned about how someone else’s property and affairs, or health and welfare matters, are being managed on their behalf.

Sadly, there are a number of instances where a person has been taken advantage of by the person they have chosen, or who has been appointed, to manage their affairs once they lose capacity.

Abuse can be physical, financial, verbal or psychological. In the case of an attorney or deputy, the abuse is often of a financial nature. In these circumstances, there are a couple of options.

Report to the Office of the Public Guardian

The Office of the Public Guardian (OPG) is the agency in England and Wales responsible for supporting people who may lose capacity, or who have already lost capacity to make decisions for themselves.

In particular, alongside other public bodies, the OPG has a duty to safeguard any person who has had a deputy appointed by the Court of Protection, or who has appointed an attorney under an Enduring or Lasting Power of Attorney.

If informed of suspected abuse, the OPG may investigate the matter itself or refer it to another body for investigation. Certain forms of abuse may constitute a criminal offence, so if appropriate, you may also wish to alert the police or other services, such as the responsible local authority, of your concerns.

Relevant contact details and guidance can be found here.

Apply to the Court of Protection

If the OPG (or other services) is unable or unwilling to investigate or take action, but you consider that it would be in a person’s best interests for someone else to be appointed to look after their affairs, you may be able to apply to the Court for:

  • The partial or complete revocation of an Enduring or Lasting Power of Attorney, and replacement with a deputy;
  • The removal of a court-appointed deputy, and replacement with an alternative deputy;
  • The appointment of a joint deputy to work alongside an existing deputy; or
  • Directions as to how the attorney or deputy should exercise their powers.

Mark Lindley TEP is a Partner in the private client team at Boodle Hatfield LLP, specialising in disputes relating to wills, trusts and mental capacity

Can the courts make a will for someone who doesn’t have mental capacity?

Posted on By Joanna Pegum
elderly man in snow

In England and Wales, the Court of Protection has the power to make a decision on a person’s behalf regarding their property and affairs, if they lack the capacity to do so (using the test for capacity set out in the Mental Capacity Act 2005).

The Mental Capacity Act expressly states that the Court of Protection can order that a will (or codicil) can be executed on behalf of a person lacking capacity. This is known as a ‘statutory will’. While the court has this power, no-one else does, so that a will executed by a person’s attorney or deputy without the court’s approval will not be valid.

When is it appropriate to ask the court to make a will on somebody’s behalf?

There are a number of circumstances where this would be necessary or desirable; for example:

  • Where someone has not made a will before they lost capacity and the intestacy rules would not make appropriate provision for their family and dependants;
  • Where someone has made a will but their circumstances have changed, so the will no longer makes appropriate provision for their beneficiaries; and/or
  • Where there are doubts about the validity of a will made by the person before it was confirmed that they no longer had capacity, and it is thought desirable for the court to make a further will in their lifetime, which may help avoid litigation after their death.

Who can make an application to the court?

Anyone can make an application, although most are made by a person’s appointed attorney or deputy, a beneficiary under an existing will or the intestacy rules, or someone seeking to become a beneficiary under a proposed statutory will.

How does the court make its decisions?

Once the court has established that a person does not have capacity, then it will consider whether or not to make the statutory will on their behalf.

It applies the same criteria as any other decision relating to a person’s property and affairs, and asks whether it would be in that person’s ‘best interests’ to execute the will on their behalf.

In reaching a final decision the court will take into consideration a variety of matters, including evidence of a person’s past wishes and feelings, their testamentary intentions and the views of their friends and family.

Mark Lindley TEP is a Partner in the private client team at Boodle Hatfield LLP, specialising in disputes relating to wills, trusts and mental capacity

What can be done where trustees or personal representatives have made a mistake?

Posted on By Joanna Pegum
worried woman at computer

Mistakes do occur in the administration of trusts and estates, whether or not the trustees or personal representatives (PRs) are professionally advised, or are professionals themselves. These often involve transfers of property by trustees/PRs that give rise to unintended tax consequences.

What are the options for dealing with a mistake?

Trustees and PRs may have claims against their professional advisors, and beneficiaries may have claims against the trustees/PRs, to compensate them for losses resulting from a mistake. Within reason, however, there is a general duty to find a way of putting matters back to where they should have been in the first place, or at least to try and limit the loss suffered.

Although going to court to try and remedy the mistake is rarely inexpensive (due to the professional costs and expense incurred in making an application), that cost may be less than the damage caused by the mistake itself, and therefore worth considering.

Possible legal remedies to a mistake include the following:

  1. Seeking a declaration from the court as to the proper construction/interpretation of a document. 
  2. Where a question of construction has arisen in relation to a trust document or a will, the court can also authorise the trustees or PRs to rely on the opinion of a barrister with at least ten years’ experience.
  3. Rectifying all or part of a document.
  4. An application by trustees or PRs using the Hastings-Bass rule (which is a trust law principle that allows certain decisions by trustees to be unscrambled on the basis that they had unintended consequences).

Some of the above options may be regarded as ‘patching up’ the problem. In some cases, however, a patch-up job is not enough. This is where rescission (setting aside a transfer as if it had never been made) comes into play.

Rescission on the grounds of mistake

If there is a need to wind back the clock, then it may be possible to set aside the transfer completely on the grounds of mistake. The legal rules provide, in summary, that where A has given property to B; A can obtain that property back by showing that ‘he was under some mistake of so serious a character as to render it unjust on the part of the donee to retain the property given to him’.

If the mistake was about the tax consequences of a transfer of property by trustees, this can be a relevant mistake for the purposes of seeking to set it aside, although each case will turn on its particular facts.

Although there’s no single solution, therefore, there are a range of options for dealing with a mistake and you should seek advice from a qualified professional to help you find the best course of action for your specific circumstances.

Mark Lindley TEP is a Partner in the private client team at Boodle Hatfield LLP, specialising in disputes relating to wills, trusts and mental capacity

I live in Europe but own assets in the UK. What will happen to my estate when I die?

Posted on By Joanna Pegum
woman at airport

Are you among the many British citizens who have retired to Spain or Portugal, but have kept your home or other assets in the UK? If so, it is important that you understand what will happen on your death.

All EU Member States, except the UK, Ireland and Denmark, apply the EU Succession Regulation, which governs cross-border or international successions of people who have died after 17 August 2015. As the UK is not bound by the Regulation, estates of British citizens who live in a Member State but hold assets in the UK may be more complex.

Which court will deal with my succession?

Under the Regulation, the court of the Member State in which you have your last ‘habitual residence’ will deal with your worldwide estate. This applies whether the assets are real estate or movable items.

Unfortunately, the Regulation does not define the concept of ‘last habitual residence’. To work this out, you need to assess your circumstances during the years leading up to your death. You’ll need to factor in how long and how often you stayed in each country, the reasons for your presence there, and where your ‘centre of interests’ is, which takes into account the full range of your social, domestic, financial, political and cultural links.

Since the Regulation does not apply in the UK, successions involving assets in a Member State as well as in the UK can give rise to problems, known as ’positive conflicts of jurisdiction’, meaning that the courts of both countries may want to deal with your succession. In order to limit this uncertainty, you should seek advice from an expert on the practical implications of the Regulation.

Which law will govern my succession?

As with the decisions as to what court deals with your succession, under the Regulation, the law of the country in which you have your last habitual residence will govern your entire succession.

If the law of a European country applies, this could also mean that some of your heirs will enjoy an enforceable right to a share of your estate, irrespective of what you may have specified in your will. This is known as ‘forced heirship’.

The Regulation does offer you another option, however. You can choose the law of your nationality (or one of your nationalities, if you hold several passports) to apply to your succession.

As this depends on your family circumstances, you should speak to an expert about making a choice of law to govern your succession.

David W Wilson TEP is a Partner/Attorney at Law at Schellenberg Wittmer in Geneva, Switzerland.