Focus On: Income Tax, Capital Gains Tax and Estates

26 April 2021 
3 minutes
Wills & Estate Planning

When it comes to considering our passing, it is quite natural to consider if Inheritance Tax may be due on our Estate. Equally, the current personal rules surrounding Income Tax and Capital Gains Tax are generally well known and understood. However, it is important to remember that these taxes alongside that of Inheritance Tax can also apply during the administration of an estate.

At the date of death, the assets of the deceased are revalued for the purposes of obtaining what is known as a ‘probate valuation’. The good thing to note is that any capital gains which may have accrued during the lifetime of the deceased are disregarded and we start out with a clean slate, so to speak. This is primarily because the assets become subject to Inheritance Tax.

During the estate administration process, any asset which is sold at more than probate value will be potentially liable to Capital Gains Tax in the hands of the Executors. After death, the Personal Representatives of the estate have what are known as the “executors’ years”, being the tax year from the date of death to the next 5th April and the two tax years thereafter. During each of these tax periods, the Personal Representatives have an annual exemption equal to that of an individual to offset against any gains the estate made have made.

If the gains exceed this annual amount, then the Personal Representatives will have to pay Capital Gains at the highest rates, which are currently 28% on residential property and 20% on all other assets.

If it appears that a Capital Gains Tax liability is going to arise, the Personal Representatives may well need to look into the possibility of transferring some or part of the gain to the beneficiaries in the process known as “appropriation”. This allows them to transfer some of the liability to beneficiaries so that the beneficiaries’ personal allowances can be used as well that of the estate, thus increasing the total amount of gain which will pass tax free.

It is also important to remember that an estate can also subject to Income Tax on any income received. Unfortunately, estates do not benefit from a tax-free allowance in this regard and so all income received is taxed at the following rates -7.5% on dividends and 20% on all other income.

At MKB Law, we will work alongside your existing professional advisors including your accountant, financial advisor or private banker to ensure that you receive coordinated and strategic advice. We maintain our close involvement with leading professional bodies and tax working groups to ensure that we are always informed of the latest developments in industry. Joined up thinking is what we do best!

If you would like further advice on Capital Gains Tax, Income Tax or on Estate Planning generally, please contact MKB Law.

This article is for general guidance only and should not be regarded as a substitute for professional legal advice.

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