Capital Gains Tax Planning for death and the interaction with Inheritance Tax
As a rule there is no Capital Gains Tax (CGT) charge on death and there is a revaluation of assets held at date of death. It is therefore possible that any long held assets would get a significant uplift in value and any built up gains would be washed away. The uplift in the base cost is of most benefit to a surviving spouse or civil partner because the transfer of the asset to that partner will also be exempt from Inheritance Tax (IHT).
The assets owned by the deceased are treated as though they have passed to the personal representatives, or other person to whom they legally pass, at their market value as at the date of death. Any capital gains tax due on a disposal of assets before the date of death will be due from the personal representatives on behalf of the deceased. Any unused capital losses of the deceased person may be carried back for up to three years, but must be offset against the latest year first before an earlier year.
Certain opportunities may arise for deathbed planning, particularly between a married couple or civil partners. If, for example, a couple have a joint investment portfolio held for a significant time on which capital gains have accrued and the wife becomes ill, her husband may transfer his interest in the portfolio to her and this would be an exempt transfer for both CGT and IHT. Then when the wife dies there will be an uplift in the base value. The deceased may leave the assets to her surviving spouse who may himself ultimately wish to pass on to their offspring or other individuals. This gift by the husband is a potentially exempt transfer and, as explained in one of our earlier articles, if he survives seven years from the date of his gift the transfer will be free of IHT.
When distributing an estate the executors may transfer assets or else sell some or all of the assets and pass the sale proceeds to the beneficiaries. Where the Executors sell assets they will be liable to account for any CGT due in the year, after deduction of their CGT annual allowance. If the beneficiaries have their own unused annual allowances it may be tax efficient if assets are passed to the beneficiaries before they are sold.
Generally speaking, over a prolonged period of time the value of many classes of assets have been found to grow and from an IHT perspective holding appreciating assets that are chargeable to inheritance tax for long periods of time increases the chargeable estate and the IHT burden on the estate.
A popular IHT planning technique is known as ‘asset freezing’ and involves substituting the asset in the individuals estate such that the appreciation in value arises to the intended beneficiaries of the estate. A simple example would be an interest free loan made from Parent to Child so that Child can acquire an investment portfolio. By Parent holding an interest free loan, the estate does not increase from year to year, but hopefully the investment portfolio acquired by Child does. The appreciation in value therefore arises directly to the subsequent generation outside the scope of IHT on Parent’s death.
A second reason why this IHT planning technique is useful is that should the need arise there is the opportunity for Parent to be repaid a portion of their interest free loan by Child. This overcomes one of the most frequent hurdles of giving away assets in that there is often uncertainty as to whether the assets will be needed by Parent in the future. The interest free loan provides that mechanism for value to be returned if necessary.
Should you have any queries or questions in respect of the above, please reach out to your usual Arnold Hill & Co contact, call our mainline on 0207 306 9100 or email us at firstname.lastname@example.org
The information in this article is believed to be factually correct at the time of writing and publication, but is not intended to constitute advice. No liability is accepted for any loss howsoever arising as a result of the contents of this article. Specific advice should be sought before entering into, or refraining from entering into any transaction.