A Beneficiary will not usually be liable to pay Capital Gains Tax on their inheritance. However, if an asset is transferred to them from the Estate (such as shares or a property, for example) and they then sell this at a later date for a profit, they may become liable for Capital Gains Tax at this stage.
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However, if Capital Gains Tax is payable by the Estate this may impact the amount a Beneficiary will receive.
How Capital Gains Tax Works during Probate
The person responsible for dealing with Probate after a person dies is called the Executor (if there was a Will) or the Administrator (if there wasn't). In the interests of simplicity, we will refer to the Executor throughout this article, but please note that the same applies to the Administrator of an Estate.
The Executor will be responsible for carrying out the legal, tax and administrative work on the Estate. One of the Executor's duties is to calculate and pay any tax that is due from the Estate, including Capital Gains Tax, Inheritance Tax and Income Tax (if applicable).
The time taken to complete the administration of a person's Estate after their death is called the Administration Period.
During the Administration Period, the assets in that Estate will need to be either sold or transferred. If assets are sold for a profit (gain) then these may be liable for Capital Gains Tax. Also, if the deceased person sold any assets in the tax year leading up to their death, then these could also be liable for Capital Gains Tax.
If Capital Gains Tax is payable, the Executor will be responsible for settling this tax out of the Estate before distributing monies to the Beneficiaries. This means that the Beneficiaries will not be liable for Capital Gains Tax, as this will already have been settled before they receive their inheritance.
Calculating Capital Gains Tax during Probate
Individuals and Executors have an annual Capital Gains Tax allowance (£11,700 for the 2018/2019 tax year). This can be applied to the Estate to reduce the capital gains tax liability for the tax year in which the death occurred and the following 2 years.
This means that if an asset is sold during the Administration Period with a gain of £10,500, then this amount will not be liable for Capital Gains Tax as it falls within the £11,700 allowance. If another asset is then sold during the same tax year for a gain of £2,000, then this will push the total 'gain' for the year up to £12,500, so £800 above the annual allowance. This means that Capital Gains Tax would be payable on the £800 difference.
Where it applies, Capital Gains Tax is charged at 28% if the gain is from the sale of a residential property, or 20% if the gain is from the sale of an asset that is not a residential property.
Selling on Inherited Assets
Once an asset has been inherited (such as a property or valuable heirloom) it becomes the property of the Beneficiary. If the Beneficiary then sells this asset on, they may be personally liable for Capital Gains Tax in the same way as the sale of any other asset.
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