Inheritance Tax or Capital Gains Tax (UK)?

My father, our last surviving parent, died about a year ago. The value of his estate was less than the threshold for inheritance tax. My brother and I are sole beneficiaries and I am the sole executor. We decided between us to spend some of the liquidated assets to improve the property, mainly to increase its desirability so that it wold be sold quickly. We have now sold the property and partly because of market increases and partly because of the improvements the value has increased by £40,000. We invested less than £10,000 and did a lot of the work ourselves. At this new value we have exceeded the inheritance tax threshold for

2005, £275,000 by about £36,000. Is the estate now liable for inheritance tax or are we as individuals each liable for capital gains tax?

I believe CGT. We inherited the property at the value on the day of my father's death and so any improvements we made are outside of the administration of the estate. My brother thinks I should declare inheritance tax and try and claim the property development costs as an executor's expense. Looking at the forms for inheritance tax I can't see quite how I can do this.

Who is right?

Reply to
prof.plum
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You are.

Peter Crosland

Reply to
Peter Crosland

I agree it's CGT. What is not quite so clear is whether it is the individuals' CGT or the estate's CGT. I think the latter. Any comments?

Reply to
GB

Sorry, I just need to qualify that. I am assuming that no attempt was made to move the property into the names of the ultimate beneficiaries. Also indicative would be who paid for the improvements.

Reply to
GB

You are. IHT is based on the value of the estate at the time of death - i.e.

*before* you improved the house.

Have you got an independent valuation of the value at the time of death?

Provided you haven't used your CGT allowances elsewhere, there should be little CGT to pay. The gain is around 30k - i.e. 15k each, and you each have an allowance of something approaching 9k (I forget the exact figure). You

*may* even be able to spread the gain across 2 tax years in which case there'll be *nothing* to pay. [Not sure about this last point - others will advise].
Reply to
Roger Mills

I'm in a similar position to the original poster. I thought to maximise the value of the property bu I never thought it might affect the value of the estate. How do you submit a tax return for an estate? I would have thought it would be "off the radar" as far as the taxman is concerned.

Reply to
bob_dykstra

The value of the estate has to be calculated at the date of death. Anything that happens after that date becomes the responsibility of the beneficiaries. Let me give an example that I have had to deal with recently. A relative died and left the bulk of their estate to me. As executor I had to collect the monies from various places and pay the debts and the leagcies. One of the deceased's assets was a Mini Cash ISA the interest on which was of course tax free. Between the date of death and the time I obtained probate the money continued to earn interest but was subject to the usual tax deduction. As the main beneficiary I have to include that on my next tax return because it has nothing to do with the estate. I did however, have to submit a tax return for the deceased covering the period from 6th April 2006 to the date of death. As it happened the deceased was below the tax threshold and nothing was actually payable. Obviously there are much more complicated possibilities but most are quite straightforward.

Peter Crosland

Reply to
Peter Crosland

Dunno in detail - but I would have thought that if property is involved, you would have to get Probate, and go through all the official channels. Probably best to employ a solicitor.

The Which? book "Wills & Probate" should explain it all - and may well give some clues as to how to go about it if you want to DIY it.

Reply to
Roger Mills

I have probate and have been through a few official channels. I thought I'd ask here as well (but I'll check with the relevant authorities before putting myself or the estate at risk.)

The issue is how do you pay tax for a dead person? Popular opinion is that the dead don't pay taxes. The estate remains only until the assets are dissolved if my understanding is correct. There is no great signing off ceremony. But if the estate earns though interest on capital or property then what form do you fill in? Or is it the case that the beneficiaries of the estate are individually liable for tax? Each on the increase in value of the proportion of the estate they inherited since the date of death until the end of the tax year. Be the assets property, ISAs, shares or savings interest.

Reply to
bob_dykstra

This is not true. The deceased may owe unpaid income tax. In that case, the tax owed is just one of the debts the estate must pay before it gets divided up.

Also, the estate *is* for all intents and purposes the deceased, and as IHT is paid by the estate, it is in effect paid by the deceased.

True.

I don't think you do as such.

That is my understanding. The details should be entered in the appropriate sections of the beneficiaries' tax returns.

Reply to
Ronald Raygun

As executor none usually. Although the executors are also trustees and as such there may be a liabilty for tax by the trust.

In many cases yes but see above.

Peter Crosland

Reply to
Peter Crosland

But if the executors sell (within some time frame which escapes me) the house for a value that is higher than the probate value then is there not an option for Capital Taxes to retrospectively revise the probate value to be the actual sale value?

Robert

Reply to
Robert

The value for probate is the usually the open market value at the date of death. The value can be revised retrospectively if HM Revenue and Customs can prove that the value for probate is wrong because of a mistake or fraud. Many years ago I helped a friend get the value changed because it had been significantly undervalued in an attempt to defraud him as a legatee. The Inland Revenue, as it was then, penalised the perpetrator quite hard and in fact they were lucky not to be prosecuted as well. HMRC will not alter the value just because prices have risen between the date of death and the sale date. Obviously the valuation at the date of death has an element of conjecture in it but provided a reasonable valuation has taken place then there should not be a problem. However, it is wise to remember that the HMRC, are not fools and do not appreciate having the Mickey taken.

Peter Crosland

Reply to
Peter Crosland

I know someone who will disagree with this. His name is also Peter.

Reply to
Ronald Raygun

How can two of you be sole beneficiaries?

Reply to
Peter Saxton

This is wrong. A tax return(s) is/(are) required from the date of death until the completion of the administration of the estate.

Reply to
Peter Saxton

I think they are incompetent rather than fools.

Reply to
Peter Saxton

Perhaps you would like to explain when it is necessary? AFAIK any income after the date of death is nothing whatsoever to do with the estate. I specifically asked HMR&C about this and they stated that in most cases it was not required. It certainly would not be so in the case the OP asked about.

Peter Crosland

Reply to
Peter Crosland

In message , Peter Crosland writes

Many wills create a trust, albeit a temporary one, in which the execs hold the assets in trust. A trust is assessable for tax on its gains and income. In many cases, you are correct, but in other cases it is the execs, as trustees, who have to pay any tax due.

Reply to
John Boyle

It's necessary when the estate receives income or gains.

I agree it wouldn't be in the case the OP raised.

Reply to
Peter Saxton

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