Mrs A is the executor of her mother’s estate. Some valuable items were left to her and her sister. She wants to sell several of these to pay debts of the estate. Will there be any tax and if so, who is responsible for it? Family tax expert Brona MacDougall provides the answers.
Administering an estate
The role of an executor is rarely straightforward and is always time consuming as our example illustrates. Mrs A might have thought that her mother’s estate was going to be simple but a lot of time is spent obtaining probate and then this tax question which she can’t find a straight answer to. If she sells an asset which her mother left to her sister, will she or the estate have to pay any tax which may result?
If you take on the role of executor and want to sell an asset which was specifically left to a beneficiary, you may not be able to unless there is no alternative, i.e. because it’s the only way the estate can raise cash to pay debts owed by the deceased. Even then you should first consult the beneficiary and check the position with a lawyer.
Tax and executors
As an executor you become the temporary owner of all the assets in the deceased’s estate (except assets they owned as joint beneficial owners with someone else; these pass automatically to the other joint owner). The assets are yours until they can be passed to the beneficiaries. This means (with one exception explained below) that you are liable for any tax on capital gains made from the sale of estate assets.
You are also responsible for reporting the transaction to HMRC. This requires the completion of a tax return. If a beneficiary requests the cash proceeds from the sale of an asset rather than the cash itself you have two options: one is to appoint the asset out of the estate to the beneficiary for them to sell in their own name – the beneficiary must then report the capital gain on their tax return and pay any tax due; two is to sell the asset within the estate and pass cash to the beneficiary after that. It is frequently more tax efficient to appoint assets to beneficiaries for them to utilise their own capital gains tax annual exempt amounts, however the situation can become more complex when dealing with property that has been a principal private residence at some point.
How much tax?
The normal capital gains tax (CGT) rules apply for working out gains. That is, the gain is the amount by which the sale proceeds exceed the asset’s cost. Note that the cost of an asset to an executor (or beneficiary) is its probate value.
Executors get the same annual CGT exemption as individuals (£12,300 for 2020/21) for the tax year in which the deceased died and the next two years. Remember this when selling more than one asset; don’t make all the sales at once and end up with a CGT bill if it can be avoided by leaving one or more sales until the following year when you get another annual exemption.
If you need to sell a number of assets some of which will produce gains and others losses, plan the sales so that the losses are used to best effect. That is, as far as possible, don’t sell loss-making assets in the same tax year as assets producing gains if the gains are covered by the annual or other exemption. Make the loss-making sales in a different year where gains are not covered by an exemption.
Executors also benefit from an additional deemed cost which can be offset against the taxable gain. This is the SP02/04 executors allowance – which is calculated by reference to the full value of the estate.
If you, as executor, sell shares or property at a loss within a certain period after death you may be able to claim for relief against any inheritance tax paid on those assets.
And finally. If you’re selling a physical item such as an antique there’s a special exemption which might apply to any capital gain called a ‘chattels exemption’.
An executor is liable for any capital gains tax and for reporting the transaction to HMRC. In the example above, the only exception to this rule would be if she appointed that asset to the beneficiary and then sold it on her behalf. In that case the beneficiary must declare the gain and pay the tax.
Also see recent article on Capital Gains Tax