Capital Gains Tax and UK Residential Property Disposals by Personal Representatives
By now we should all be aware of the current requirement to submit a capital gains tax (CGT) return and pay the tax no later than 60 days after completion of a disposal of UK residential property (the 60 Day Window) that gives rise to a CGT liability (Schedule 2, Finance Act 2019, as amended by s.23 Finance Act 2022). For disposals completing before 27 October 2021 returns, etc. needed to be submitted within 30 days of completion of the disposal. More detail of the reporting requirements is set out in Appendix 18 in the HMRC Capital Gains Manual.
The 60 Day Window can pose a challenge to those administering an estate (Personal Representatives – PRs) as to whether, say, a sale they are making will result in a CGT liability.
Often the PRs are able to appropriate the residential property to the beneficiaries before the sale, one effect of which is that the reporting obligation then falls on the beneficiaries (to the relief of the PRs).
However, there are situations where the PRs cannot appropriate the property (or the whole of the property) to the beneficiaries and will therefore need to identify if a CGT liability arises and a return made during the 60 Day Window.
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A CGT liability will potentially arise if the gain on sale exceeds the PR’s available annual CGT allowance (also taking into account the “Re Richards’ allowance” see CG30560 & CG30570). For the purpose of identifying if a return needs to be made within the 60 Day Window, the annual CGT allowance is reduced only by the amount of any gain on the sale by the PRs of other UK residential property within the same tax year. If the PRs have sold any UK residential property during the same tax year which gives rise to a loss for CGT purposes, that loss may be set against a gain to identify if a liability arises, requiring the submission of a return (and payment of CGT) within the 60 Day Window.
Generally, there are no reliefs from CGT that a PR may claim. Although the deceased may have been able to claim main residence relief during their lifetime (s.222 Taxation of Chargeable Gains Act 1992 – TCGA 1992), entitlement to that relief dies with them and is not available to their PRs. However, if the beneficiary (or beneficiaries) who would otherwise have been entitled to at least a 75% interest in the property under the terms of the will (or intestacy), either absolutely or via a life interest, would have been entitled to claim main residence relief as at the date of sale, s.225A TCGA 1992 may be available to the PRs to relieve the gain (and the need to make a CGT return within the 60 Day Window).
The text of s.225A TCGA 1992 is set out in full below, and the following should be noted:
- S.225A(4) sets out a mandatory presumption that none of the sale proceeds are required to meet the liabilities of the estate. HMRC has confirmed that this includes not just any IHT due, and debts of the estate, but also any general/cash legacies;
- As legacies are liabilities of the estate that are to be left out of account when identifying the extent of a beneficiary’s entitlement to an interest in the residence being sold they cannot be aggregated with, say, the value of a share of residue to try and achieve the required 75% requirement to trigger relief under s.225A.
- HMRC takes the view that s.225A(3) is to be applied at the time of the sale. If the beneficiary in respect of whom s.225A may be claimed dies before the sale completes, as it is then the beneficiary’s estate which receives the sale proceeds (and not the beneficiary), s.225A cannot apply to their interest. This may be seen by many as “unfair”, especially as HMRC also indicates that no time apportionment of the gain will be allowed for the period during which the beneficiary would otherwise have been entitled to claim main residence relief had their interest in the property been appropriated to them (or trustees for them) during their lifetime.
- If, at the time of the sale, residue has been ascertained then, notwithstanding that the property has not been appropriated or vested in the beneficiary entitled, the disposal will be deemed to have been made by the beneficiary, not the PR, and CGT relief under either s.222 (absolute entitlement) or s.225 (life interest) TCGA 1992 may apply to the sale.
Scenarios (With the responses from HMRC summarised)
The following are a selection of possible scenarios that PRs will come across whilst administering an estate. They are not exhaustive and it is recommended that if s.225A TCGA 1992 could apply in any particular circumstance the PR might seek advice from a suitably qualified person on the applicability of that provision (and the time line for submission of a return).
- T dies and his widow and son are each given half of the estate (each half share being worth £350,000). The matrimonial home is sold by the executor before any distributions are made, the sale proceeds being £400,000.HMRC: As the entitlement of each of the widow and son can only be an undivided interest in all of the assets of the whole estate neither of them, on their own, has an entitlement to 75% or more of the net proceeds of sale. s.225A only applies in these circumstances if both the widow and son occupy the property as their main residence as at the date of T’s death. It must be noted, though, that if they are not in occupation when the property is sold, the gain may not be relieved in full.
- H dies intestate, leaving a widow and children. His widow is entitled to the statutory legacy of £270,000 and a half share of the remainder of the estate (£130,000), a total of £400,000. The matrimonial home is sold by the personal representative for £350,000 before any distribution is made.HMRC: s.225A(4) requires the existence of liabilities of the estate, including any legacies, to be ignored when identifying if s.225A applies. The statutory legacy must therefore be left out of account when identifying the widow’s entitlement. Accordingly, the widow and children are in the same position as in Scenario 1. s.225A only applies in these circumstances if the widow and children who between them have at least a 75% interest in the property occupy it as their main residence as at the date of T’s death. It must be noted, though, that if they are not in occupation when the property is sold, the gain may not be relieved in full.
- A dies, leaving an estate of £400,000. There are cash legacies of £300,000 and residue is left to the surviving spouse. The matrimonial home is valued at £350,000 and is sold by the executors to enable payment of the cash legacies. The sale of the property realises £420,000, net, a gain of £70,000.HMRC: s.225A applies in these circumstances and no CGT is payable. Despite the fact that most of the sale proceeds will be used to satisfy the cash legacies, in order to identify if s.225A applies the liabilities of the estate, including payment of the legacies, are ignored. The effect of ignoring the legacies is that the widow is considered to be entitled to 100% of the net proceeds of sale.The same outcome would apply if, say, the house was subject to a mortgage debt of £300,000.
- T dies, leaving the matrimonial home (£400,000) to his widow; an investment portfolio (£200,000) to his brother; cash legacies totalling £100,000; and residue to his children (by his first marriage). He has significant debts as result of which the gifts of both residue and the cash legacies abate in full, leaving a shortfall of £300,000 to be met out of the specific legacies of the house and the investment portfolio. As both gifts abate by 50%, the executors sell the house (for £430,000) and half of the investments.HMRC: s.225A applies in these circumstances and no CGT is payable. The first and second conditions in s.225A(2) and (3) are both met and as such s.225A applies on the disposal, even though in the real world the widow will receive less than 75% of the sale proceeds (after the debts have been paid).
- H (a widower) dies, leaving his investment portfolio (£650,000) to his children; cash legacies of £120,000 to charities; and residue (including his house valued at £110,000) to his brother with whom he shared the house. He has significant debts, which wholly consume the residue and most of the value of the cash legacies. The executors sell the house for £140,000.HMRC: s.225A applies in these circumstances and no CGT is payable. If the estate had no debts and the residue had been ascertained, the brother would have been entitled to 100% of the sale proceeds of the property, so again both conditions of s.225A are met. Again in the real world, the brother will not be entitled to a penny from the sale of the house but, in the space within which s.225A operates, he was “entitled” to 100% of the proceeds.
- Husband and wife make mirror wills creating a nil rate band discretionary trust (NRBDT), with residue passing to the survivor on the first death. They own their home as tenants in common in equal shares. The wife dies and her estate consists of her share of the house (valued at £150,000) and £2,000 in a bank account. Accordingly, at the time of her demise, the estate was insufficient to satisfy the NRBDT in full. The husband dies some 9 years later with his wife’s estate still unadministered. The property is then sold for £300,000.HMRC: In the circumstances, as set out, s.225A(4) will apply so that the value of the nil rate band legacy is left out of account. Applying s.225A(4), the Husband would have been treated as entitled to 100% of the net proceeds of sale of his late wife’s half share (up until his own death). Had the property been sold during his lifetime, s.225A would have applied and no CGT would have been payable.However, in this scenario, the property is sold only after the husband has died. It is therefore his PRs who are entitled to the proceeds of sale of the wife’s share, and not the husband. s.225A(3) speaks from the time of the disposal, at which time the husband was not entitled to receive any of the sale proceeds of his late wife’s share, and so the second condition of s.225A(3) is not met. Accordingly, s.225A does not apply to the disposal by the wife’s PRs and they are liable for CGT on the gain from the date of the wife’s death.
Whilst there are many estates where relief under s.225A may be relevant (at least in relation to the timeline for the submission of a return, if not the payment of CGT), as identified above the circumstances under which the provision applies are not necessarily obvious.
If s.225A applies, the PRs will be required to disclose the disposal on the annual estate tax return for the tax year in which the disposal occurred. If the provision does not apply, and a taxable gain arises then the return must be submitted within the 60 Day Window.
Where the circumstances are such that s.225A could apply PRs might seek advice from a suitably qualified person on the applicability of that provision (and the time line for submission of a return).
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