Deemed purchase price for inheritance taxation purposes?

[Newroad]

Evening All.

I have a friend (yes really, not me ) who is single with no dependants. He has an idea of whom he like to leave his not insubstantial seven-figure estate to, at least in part, but they would be surprised to receive it, having been out of contact for some time.

Most of his investments are in investment trusts, some tax sheltered in ISA's, some not. The issue is that he has been accumulating them for many years, but he has no idea how much any/all of them cost initially to purchase.

I imagine, for inheritance tax purposes (especially for the non-sheltered ones) that the purchase price is relevant - i.e. the inheritance tax would at some level be a function of the capital gain for each?

If not, great, if so, any idea what HMRC would deem to be the purchase price if no-one had any idea? There is an outside chance my friend may ask me to be executor of his will, so this may become relevant for me (and depending on the answers, I may encourage him to use a suitable legal firm).

Regards, Newroad

[SalvorHardin]

The purchase price isn't needed for inheritance tax (IHT) in the UK (unlike some other countries).

What's needed is the price on date of death. IHT is based on the total estate value; capital gains don't come into it.

[Newroad]

Thanks, SalvorHardin.

That is very helpful!

Regards, Newroad

[mc2fool]

As stated, there's no capital gains tax on unrealised assets at death, it's just their value at that time that's used for IHT.

However their cost basis going forward is reset to that value, so if an asset is sold by the estate and its value has risen since the person died, the estate is (potentially) liable to pay CGT on the increase since the person’s death.

Also, should an asset be passed on as is, the beneficiary inherits it at its probate value, so when they eventually sell it they will (potentially) pay CGT on the increase in value from when the person died to when it was sold.

[DrFfybes]

As stated, there's no capital gains tax on unrealised assets at death, it's just their value at that time that's used for IHT.

However their cost basis going forward is reset to that value, so if an asset is sold by the estate and its value has risen since the person died, the estate is (potentially) liable to pay CGT on the increase since the person’s death.

Also, should an asset be passed on as is, the beneficiary inherits it at its probate value, so when they eventually sell it they will (potentially) pay CGT on the increase in value from when the person died to when it was sold

Really? -So if an investment account rises £20k between death and transfer to the beneficiary, both the Estate AND the Beneficiary would be liable to CGT on the gain? That seems usually harsh, even for HMRC. All the more reason to cash in and transfer as cash.

The flip side is that as IHT will presumaby be payable, if the actual sale price of the investments is lower than the value at death then you can reclaim the overpaid IHT.

Paul

[Gersemi]

Really? -So if an investment account rises £20k between death and transfer to the beneficiary, both the Estate AND the Beneficiary would be liable to CGT on the gain? That seems usually harsh, even for HMRC. All the more reason to cash in and transfer as cash.

The flip side is that as IHT will presumaby be payable, if the actual sale price of the investments is lower than the value at death then you can reclaim the overpaid IHT.

Paul

Gov.uk has the answer at https://www.gov.uk/probate-estate/manag ... ing-assets

If you sell shares, investments or property that belong to the estate you may have to pay Capital Gains Tax on them if either:

they’ve gone up in value since the person died
they’ve gone up in value since being valued for Inheritance Tax

You do not pay Capital Gains Tax from the estate if you transfer assets directly to a beneficiary, for example property.

[Dod101]

I think the answer to that is that the probate value will be deemed to have increased to the higher figure and so the beneficiary will use the higher figure as his base value for the asset. There is not going to be a double charging.

Dod

[DrFfybes]

Yes - I realised after I'd misread Mc2Fool's post, but it was too late to edit mine.

Paul

[Gersemi]

I think the answer to that is that the probate value will be deemed to have increased to the higher figure and so the beneficiary will use the higher figure as his base value for the asset. There is not going to be a double charging.

Dod

No it's not. As I explained above the estate does not pay Capital Gains Tax on assets transferred directly to a beneficiary, so they acquire at the probate value for CGT purposes.

[Dod101]

I think the answer to that is that the probate value will be deemed to have increased to the higher figure and so the beneficiary will use the higher figure as his base value for the asset. There is not going to be a double charging.

Dod

No it's not. As I explained above the estate does not pay Capital Gains Tax on assets transferred directly to a beneficiary, so they acquire at the probate value for CGT purposes.

Well I am quite sure that it is not me that is wrong but those trying to tell us that the estate pays CGT on the uplift in value and the beneficiary does so as well. Or maybe that has now been covered.

The increase in value recognised by the estate is for the purpose of IHT alone. A beneficiary then uses the original probate valuation as his base cost. That makes sense.

Dod

[mc2fool]

No it's not. As I explained above the estate does not pay Capital Gains Tax on assets transferred directly to a beneficiary, so they acquire at the probate value for CGT purposes.

Well I am quite sure that it is not me that is wrong but those trying to tell us that the estate pays CGT on the uplift in value and the beneficiary does so as well. Or maybe that has now been covered.

Nobody has actually said that; DrFfybes asked if that was the case after misreading my post.

CGT (potentially) arises when an asset is sold. If the estate sells it and it has risen in price since the death then the estate is (potentially) liable for CGT on that increase, and if the asset is instead passed on then the beneficiary will be (potentially) liable for CGT on the increase since death when they eventually sell it.

The key point here for Newroad, and the reason for my OP, is that while he asked about determining the purchase price for CGT on death and has had explained that there is no CGT on death, that doesn't mean that that's the end of CGT information keeping concerns, esp. as he may be the executor. The price of assets at death must be determined (for probate anyway) and recorded either for use by the estate, if the assets are sold by it, or passed on to the beneficiary with them if the assets are transferred on.

[scrumpyjack]

The beneficiaries acquire assets at their probate valuation, no matter when the Executor transfers those assets to them.
Often the Executor will sell assets during the estate administration. The Estate pays CGT on such disposals but has its own CGT allowance for the first 2 years of administration.

The Executor has the option of substituting sale proceeds for probate value and reclaiming IHT if the shares had fallen in value. But in calculating this, must take into account ALL disposals in the 12 months after death. So it can be a sensible strategy to sell the losers in the first 12 months but hang on to the winners and not dispose until after 12 months. Sometimes estates take quite a long time to complete administration, and not because of the executor being slow!