Capital Gains Tax

A Deed of Appropriation can help mitigate the effect of Capital Gains Tax (CGT) upon the sale of a deceased’s property.

Although an individual’s principal private residence is normally exempt from CGT, once a person has died the personal representatives become the legal owners of the property and the principal private residence exemption is no longer available.

The introduction in 2010 of a higher rate of CGT at 28% for higher rate income tax payers means that personal representatives of an estate may have to pay CGT at 28% if a property has increased significantly in value between the date of death and the date the property is sold.

One way of beating the higher rate of CGT is to ‘appropriate’ the property to the beneficiaries of the estate by means of a Deed of Appropriation which would allow the personal representatives to hold the property for the beneficiaries as bare trustees. This would mean that the beneficiaries have an absolute right to the property and can utilise their own annual tax free allowance providing they have not made other chargeable gains in that tax year. If they are basic rate tax payers, CGT will be charged at the lower rate of 18% rather than 28%.

For example:

Sandra and Steve are the residuary beneficiaries of their late uncle’s estate. Since the date of his death the property has increased in value and as a result they have agreed a sale price of £300,000, which is £50,000 more than the probate valuation. The executors ask their solicitors to ‘appropriate’ the property to the beneficiaries. As a result, Sandra and Steve are both able to apply their annual tax free allowance of £10,600 and the gain is reduced by £21,200. Sandra and Steve are both basic rate income tax payers and therefore CGT at 18% is payable on the balance.

For further advice as to ways you can mitigate your Capital Gains Tax liability please contact Clare Fleming on 01494 478619.