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IHT versus CGT on bequeathed property

Practical Issues
Raheen
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IHT versus CGT on bequeathed property

#258335

Postby Raheen » October 16th, 2019, 9:14 pm

An old person dies leaving the total estate to 4 neices/nephews.
Of the whole estate the house is about 50%
The full Form 400 is completed (and all its horrid extras) and a valuation of the person's
house is declared at £500k. HMRC are content. An enquiry comes from the Valuation folks &
after an explanation, it confirms that it is content & also confirms that it has notified HMRC that it is content.
Tax paid from investments.
HMRC clears matters --- on to Probate, which despite this year's problems isn't too bad.
Probate granted ! On to house sale ... Oops it will sell for about £600k.
Assume £600k v £500k = Gain £100k

Option 1:
Fess up, fill in Form IC4. Incur a further hit of 40% of new value £600k ie £40k ! . OR

Option 2;
Stay as ls - the heirs should sit tight & accept that they should pay CGT on the increase, split 4 ways -
Legatee 1 Gain £ 25k CGT allowance £ 12k - lower rate payer @ 18% = £ 2,340
Legatee 2 Gain £ 25k CGT allowance £ 12k - lower rate payer @ 18% = £ 2,340
Legatee 3 Gain £ 25k CGT allowance £ 12k - higher rate payer @ 28% = £ 3,640
Legatee 3 Gain £ 25k CGT allowance £ 12k - higher rate payer @ 28% = £ 3,640
Sum = £ 11,960
Ideas, thoughts or even warnings, please.

Chrysalis
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Re: IHT versus CGT on bequeathed property

#258338

Postby Chrysalis » October 16th, 2019, 9:33 pm

Fess up, and HMRC might actually agree that the probate valuation can stand. That’s what happened to us. The sale of the house was about 6 months after the date of death, and a few weeks after probate was granted. Sale price about £100k higher than probate valuation, HMRC accepted the latter as the valuation for estate tax purposes so we paid CGT instead.
I understand that they could change their mind in the next year or so.

I don’t think it would be a good idea not to declare it.

JohnB
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Re: IHT versus CGT on bequeathed property

#258340

Postby JohnB » October 16th, 2019, 9:52 pm

Isn't it the estate that pays CGT on any uplift that occurs before distribution. It has a single allowance and pays tax at 28%, so around £25k in your case.

https://www.co-oplegalservices.co.uk/me ... executors/

PinkDalek
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Re: IHT versus CGT on bequeathed property

#258341

Postby PinkDalek » October 16th, 2019, 10:00 pm

Can you link to or provide the full name of the form IC4 you mention?

Also what precise information was included on page 4, item 12, of the IHT405 with regards to any potential sale within 12 months and what was the entry under 12F?

How long ago was the death?

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/715280/IHT405_online-v3.pdf

Chrysalis
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Re: IHT versus CGT on bequeathed property

#258376

Postby Chrysalis » October 17th, 2019, 7:46 am

@JohnB, yes now I think about it, that’s what happened in our case. But I think it might depend on whether the property ownership was changed before the sale - ie did the estate sell the house, or the new owners.

And yes, we had indicated that the property was going to be sold, and that a change in value might be anticipated. Our solicitors were actually rather surprised that HMRC did not uplift the valuation and apply the IHT rate to the excess.
Last edited by Chrysalis on October 17th, 2019, 7:48 am, edited 1 time in total.

scrumpyjack
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Re: IHT versus CGT on bequeathed property

#258377

Postby scrumpyjack » October 17th, 2019, 7:48 am

If the house is sold in the Administration period by the Executor, then as another poster said, it is the estate that pays CGT but it does have a personal allowance during the admin period (unless that exceeds 2 full tax years from the date of death)

The Executor could allocate a share of the property to each beneficiary and then leave it to them to sell after completing the admin period and the estate accounts. There isn't a stamp duty liability in doing this.

One other point to bear in mind is that if the house is valued for probate at 600k and the selling price is 600k, you get no tax deduction for the selling costs (estate agent fees and conveyancing costs etc). These are NOT deductible for IHT whereas they are deductible for CGT.

JohnB
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Re: IHT versus CGT on bequeathed property

#258381

Postby JohnB » October 17th, 2019, 8:09 am

If the house sells for less than its probate valuation, will HMRC allow the IHT figure to be revised downwards? I am concerned that Mum's house, the most dilapidated in the area, would be hard to value and might need discounting to sell, and I'd rather the reduction be spread widely.

Chrysalis
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Re: IHT versus CGT on bequeathed property

#258395

Postby Chrysalis » October 17th, 2019, 9:11 am

I don’t know, as I’m not a lawyer. Our legal input was actually pretty helpful on this, although they were very slow and not hugely confidence inspiring. My understanding is that if the sale is close to the date of probate, HMRC can substitute the actual sale value and adjust tax accordingly. So I would think yes, so long as it doesn’t take years to sell. On the upside, if you inherit the house and then sell it, at a loss, you have a capital loss which might be handy to offset investment gains ;-)
I think it’s a bit more complicated if selling to a family member/a beneficiary without open market testing, as HMRC might scrutinise the valuation paperwork a bit more thoroughly.

PinkDalek
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Re: IHT versus CGT on bequeathed property

#258416

Postby PinkDalek » October 17th, 2019, 10:38 am

JohnB wrote:If the house sells for less than its probate valuation, will HMRC allow the IHT figure to be revised downwards? I am concerned that Mum's house, the most dilapidated in the area, would be hard to value and might need discounting to sell, and I'd rather the reduction be spread widely.


Will your Mother's estate be subjected to IHT?

Any relief depends on the timing of the disposal and, as before, what precise information was included on page 4, item 12, of the IHT405 with regards to any potential sale within 12 months and what would be the entry under 12F?

If IHT clearance was obtained before eventual disposal then relief is available in certain circumstances (sale within 4 years and claim within 7) using IHT38:

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/373493/IHT38.pdf

Also see https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm33022 onwards.

and I'd rather the reduction be spread widely.


Not understood.

Raheen
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Re: IHT versus CGT on bequeathed property

#258423

Postby Raheen » October 17th, 2019, 10:50 am

Apologies.
In my original post I said that the IHT form was "IC4"

It is, in fact "C4" - Its description reads -
"Use Form C4 to correct the Inheritance Tax paid on Form IHT400"

PinkDalek
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Re: IHT versus CGT on bequeathed property

#258429

Postby PinkDalek » October 17th, 2019, 11:07 am

Returning to your OP:

Raheen wrote:[Option 1: Fess up, fill in Form IC4. Incur a further hit of 40% of new value £600k ie £40k ! .]


PinkDalek wrote:Can you link to or provide the full name of the form IC4 you mention?


I think you are referring to Form C4, this being a Corrective Accounthttps://www.gov.uk/government/publications/inheritance-tax-corrective-account-c4.

I'm unsure, having agreed the valuation at date of death, whether or not Form C4 is applicable.

That might depend on whether or not the executors have applied for and received an IHT Clearance Certificate using https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/373484/IHT30.pdf.

Do note This certificate is not valid in certain circumstances, such as in the case of fraud or failure to disclose material facts or if further tax becomes payable as a result of an instrument of variation - see section 239 (4) Inheritance Tax Act 1984. at the foot of that form. Presumably all material facts were disclosed during the discussions with the Valuation Office Agency.

Edit: I was typing and missed your reply above.

scrumpyjack
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Re: IHT versus CGT on bequeathed property

#258448

Postby scrumpyjack » October 17th, 2019, 12:23 pm

AFAIW as long as you made your original valuation in good faith and it was based on appropriate evidence (eg a surveyor’s valuation), I don’t think you need to submit a corrective.

In executorships I have carried out I have been advised to have a Chartered Surveyor’s valuation and have done so.

You do need to disclose on the IHT form if you intend, at the time of submitting the form, to sell the property with 12 months of death.

Normally a corrective is used where you discover an additional asset or liability. That is not the case here.

If you did not have a professional valuation to support the £500k figure, I think you probably should inform the capital taxes office of this (you can just write them a letter), or try and get a professional opinion that the property was in fact correctly valued at £500k at the date of death.

supremetwo
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Re: IHT versus CGT on bequeathed property

#258450

Postby supremetwo » October 17th, 2019, 12:26 pm

scrumpyjack wrote:If the house is sold in the Administration period by the Executor, then as another poster said, it is the estate that pays CGT but it does have a personal allowance during the admin period (unless that exceeds 2 full tax years from the date of death)

The Executor could allocate a share of the property to each beneficiary and then leave it to them to sell after completing the admin period and the estate accounts. There isn't a stamp duty liability in doing this.

One other point to bear in mind is that if the house is valued for probate at 600k and the selling price is 600k, you get no tax deduction for the selling costs (estate agent fees and conveyancing costs etc). These are NOT deductible for IHT whereas they are deductible for CGT.

Not just 'allocate'.

The executor will need to actually transfer the shares into the names of the legatees before any contracts of sale are drawn up.
https://www.gov.uk/government/publicati ... ansfer-tr1

This is a fairly simple process provided there are no more than four otherwise you need to set up a trust.

3.5 Panel 5: the transferee(s)
Insert the full names of all the people to whom the property is to be transferred (maximum of four). Do not include the titles “Mr” or “Mrs”, but if you have any other title, please include it.


If legatee 3 has a lower-rate taxpaying spouse, there is nothing to stop him/her agreeing that the executor transfers part to that person.

PinkDalek
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Re: IHT versus CGT on bequeathed property

#258455

Postby PinkDalek » October 17th, 2019, 12:48 pm

scrumpyjack wrote:... If you did not have a professional valuation to support the £500k figure, I think you probably should inform the capital taxes office of this (you can just write them a letter), or try and get a professional opinion that the property was in fact correctly valued at £500k at the date of death.


The OP indicates the original valuation has been agreed with the Valuation Office Agency. I don't see why the Executors should now attempt to reopen that discussion.

scrumpyjack
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Re: IHT versus CGT on bequeathed property

#258476

Postby scrumpyjack » October 17th, 2019, 1:36 pm

Yes on reflection I think you are probably correct. If the valuation was made in good faith and on reasonable grounds, I can't see a need to tell the Inspector. But it might be prudent for the executor to be sure that if the IHT valuation is subsequently reopened and additional IHT demanded, the cash to pay it is available.

eisman
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Re: IHT versus CGT on bequeathed property

#263765

Postby eisman » November 12th, 2019, 4:26 pm

Just noticed this thread, and thought I would add my ten penn'orth.

A gain made on sale of an estate asset by the Executors is not always taxable on the estate. If the estate has been ascertained (all assets and liabilities established) before the sale AND the relevant beneficiaries entitled under the Will have been established, then it is possible to contend that the beneficial interest in the asset has passed to the beneficiaries, such that the Executors hold as 'bare trustee' for the beneficiaries. Liability to capital gains tax falls on beneficial owners, not legal owners (if different).

Estate assets are commonly 'assented' (legally transferred) to the beneficiaries once the estate has been ascertained and, in such case, transfers of legal ownership in land are required to be in writing. However, in the case of real property that is to be sold anyway, a sale by the Executors in their capacity as bare trustees avoids the costs of a transfer of legal ownership to the beneficiaries.

See HMRC manual CG30700 et seq, and CG 30940 in particular:
"The requirement that assents in respect of land must be in writing, see CG30900, should be regarded as applying only to the legal ownership of the land. Therefore the beneficial ownership of all assets should, except in the exceptional cases detailed in CG30710, be considered to have vested in the legatees once residue of the estate has been ascertained, see CG30780+."

For added safety, the Executors should ideally instruct the selling agent and solicitors that they are selling in their capacity as bare trustees for the (named) beneficiaries.

Raheen
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Re: IHT versus CGT on bequeathed property

#332190

Postby Raheen » August 10th, 2020, 4:16 pm

UPDATE:
With the sale imminent (for £600k or so), the Executor 'phoned the IHT Helpline.
After outlining the situation as described in the OP, the IHT person said, "Yes, recognising the change in value by paying CGT is the right answer".

Given that there are 4 beneficiaries, (each with a £12+ CGT allowance) & there have been significant capital expenses in getting the house in good enough shape to sell, coupled with the ability to claim estate agent's fees plus solicitor's - the CGT route is very attractive when compared with
declaring further £100k on Form IHT C4 !


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