Learning Outcomes
After studying this article, you will be able to explain when and how personal representatives are liable for Capital Gains Tax (CGT) during estate administration, calculate gains and apply available exemptions, identify reporting and payment obligations, and understand the interaction between CGT, income tax, and estate administration. You will also be able to apply these principles to SQE1-style scenarios.
SQE1 Syllabus
For SQE1, you are required to understand the tax responsibilities of personal representatives during estate administration, especially regarding Capital Gains Tax. Focus your revision on:
- the liability of personal representatives for Capital Gains Tax on disposals of estate assets
- calculation of gains and losses, including the use of date-of-death values as acquisition cost
- application of annual exemptions and relevant reliefs (e.g., Principal Private Residence Relief, Hold-Over Relief)
- reporting and payment deadlines for CGT, including special rules for residential property
- the interaction between CGT, income tax, and estate administration
- the effect of asset transfers to beneficiaries and the passing of latent CGT liability
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- When are personal representatives liable to pay Capital Gains Tax during estate administration?
- What value is used as the acquisition cost for CGT purposes when an estate asset is sold by the personal representatives?
- What is the annual CGT exemption for estates, and how long does it apply?
- What is the reporting deadline for CGT on the sale of UK residential property by personal representatives?
- How does Principal Private Residence Relief apply to estate administration?
Introduction
During the administration of a deceased person's estate, personal representatives (PRs)—executors or administrators—are responsible for settling the deceased's tax affairs. This includes liability for Capital Gains Tax (CGT) if estate assets are sold for more than their value at the date of death. PRs must calculate gains, apply exemptions and reliefs, and comply with strict reporting and payment deadlines. Understanding these duties is essential for SQE1 and for effective estate administration in practice.
Personal Representatives' Liability for Capital Gains Tax
Personal representatives are liable to CGT if they dispose of estate assets and those assets have increased in value since the date of death. This liability arises only on actual disposals (e.g., sales or gifts) made during the administration period.
Key Term: personal representatives (PRs) The executors or administrators responsible for collecting in, managing, and distributing the estate of a deceased person.
Key Term: Capital Gains Tax (CGT) A tax on the profit (gain) made when certain assets are sold or otherwise disposed of for more than their acquisition cost.
Calculation of Gains
For CGT purposes, the acquisition cost of an estate asset is its market value at the date of death. When PRs sell an asset, the gain is the difference between the sale proceeds (less allowable costs) and the date-of-death value.
Key Term: date-of-death value The open market value of an asset at the date of the deceased's death, used as the acquisition cost for CGT calculations during estate administration.
If the asset is sold for less than its date-of-death value, a capital loss arises, which can be set against gains.
Annual Exemption
PRs benefit from the same annual CGT exemption as individuals (£12,300 for 2023/24), but only for the tax year of death and the following two tax years. After this period, no annual exemption is available to the estate.
Key Term: annual exemption (CGT) The amount of gains that can be realised in a tax year before CGT is payable. For estates, this applies only for the year of death and the next two tax years.
CGT Rates
The rates of CGT for PRs are:
- 20% for most assets
- 28% for gains on residential property
These rates apply regardless of the PRs' or beneficiaries' income.
Reporting and Payment Deadlines
PRs must report and pay CGT on disposals of UK residential property within 60 days of completion. For other assets, CGT is reported and paid by 31 January following the end of the tax year in which the disposal occurred.
Key Term: 60-day CGT return A special reporting requirement for disposals of UK residential property, requiring CGT to be reported and paid within 60 days of completion.
Transfers to Beneficiaries
When PRs transfer assets to beneficiaries in satisfaction of a legacy or share of residue, this is not a disposal for CGT purposes. The beneficiary acquires the asset at its date-of-death value. If the beneficiary later sells the asset, they are liable for CGT on any gain since the date of death.
Key Term: appropriation The transfer of a specific asset from the estate to a beneficiary in satisfaction of their entitlement.
Income Tax During Administration
PRs are also responsible for income tax on income arising during the administration period (e.g., rental income, interest, dividends). Income tax is calculated and paid at basic rates, and PRs must provide beneficiaries with tax certificates for income distributed.
Key Term: administration period The period from the date of death until the completion of the estate administration, during which PRs manage the estate's assets and liabilities.
Reliefs and Exemptions
Principal Private Residence Relief
If the deceased's main residence is sold during administration, Principal Private Residence (PPR) Relief may exempt some or all of the gain from CGT, provided the property was the deceased's only or main residence at some point. The final period exemption is now 9 months.
Key Term: Principal Private Residence Relief (PPR Relief) A relief that exempts all or part of the gain on the sale of a property that was the owner's only or main residence.
Hold-Over Relief
Hold-Over Relief (TCGA 1992 s.165) may be available when business assets or agricultural property are transferred to beneficiaries. The gain is deferred, and the beneficiary takes the asset at the deceased's original base cost.
Key Term: Hold-Over Relief A relief allowing CGT on certain gifts (e.g., business assets) to be deferred until the recipient disposes of the asset.
Other Reliefs
- Business Asset Disposal Relief: May reduce the CGT rate to 10% on qualifying business assets.
- Investors' Relief: May apply to certain shares in unlisted trading companies.
Reporting and Compliance
PRs must keep detailed records of all asset valuations, sales, and associated costs. Timely reporting is essential, especially for UK residential property, where the 60-day deadline is strictly enforced. Late reporting can result in penalties and interest.
Worked Example 1.1
The estate of Mr. Patel includes a flat valued at £300,000 at death. The PRs sell the flat 10 months later for £340,000, incurring £5,000 in estate agent and legal fees. What is the chargeable gain, and what are the reporting obligations?
Answer: The gain is £340,000 (sale price) minus £300,000 (date-of-death value) minus £5,000 (costs) = £35,000. The PRs can use the annual exemption if within the first two tax years. As the asset is UK residential property, the gain must be reported and CGT paid within 60 days of completion.
Worked Example 1.2
An estate includes shares valued at £50,000 at death. The PRs sell the shares for £60,000 in the second tax year after death. There are no other gains or losses. What is the CGT liability?
Answer: The gain is £60,000 - £50,000 = £10,000. If within the first two tax years after death, the annual exemption (£12,300) covers the gain, so no CGT is payable.
Worked Example 1.3
The PRs appropriate a rental property to a beneficiary. The property was valued at £200,000 at death. The beneficiary sells it a year later for £220,000. Who is liable for CGT, and on what amount?
Answer: The beneficiary is liable for CGT on the gain since the date of death: £220,000 - £200,000 = £20,000 (less any allowable costs and their own annual exemption).
Exam Warning
For UK residential property sales by PRs, the 60-day reporting and payment deadline is mandatory. Missing this deadline results in automatic penalties and interest, regardless of the reason for delay.
Revision Tip
When calculating gains, always use the date-of-death value as the acquisition cost for PRs. Keep records of all valuations and sale costs for HMRC compliance.
Key Point Checklist
This article has covered the following key knowledge points:
- PRs are liable to CGT on gains made from sales of estate assets during administration.
- The acquisition cost for CGT is the asset's market value at the date of death.
- The annual CGT exemption applies for the tax year of death and the next two tax years only.
- CGT on UK residential property sales must be reported and paid within 60 days of completion.
- Principal Private Residence Relief may exempt gains on the deceased's main home.
- Hold-Over Relief may defer CGT on certain business or agricultural assets transferred to beneficiaries.
- Transfers of assets to beneficiaries are not disposals for CGT; beneficiaries acquire assets at date-of-death value.
- PRs are responsible for income tax on estate income during administration.
- Accurate record-keeping and timely compliance with reporting deadlines are essential to avoid penalties.
Key Terms and Concepts
- personal representatives (PRs)
- Capital Gains Tax (CGT)
- date-of-death value
- annual exemption (CGT)
- 60-day CGT return
- appropriation
- administration period
- Principal Private Residence Relief (PPR Relief)
- Hold-Over Relief
