Reductions in Capital Gains Tax are go!
As it's announced that the headline Capital Gains Tax rates will be cut from 28% to 20%, and from 18% to 10% for basic-rate taxpayers, who will be the winners and losers? Now that the dust has settled on immediate thoughts of the Budget, Blake Morgan takes a look at how the changes could impact on the administration of estates.
How does CGT impact my estate?
CGT is charged on any gain created when there is a gift or sale of an asset after deduction of the costs of sale, losses and any annual allowance. As mentioned, the 2016 Budget announced dramatic reductions in the level of CGT payable in certain circumstances, coming in to force from 6 April 2016.
Let's consider the position of a personal representative (we'll call him Virgil) administering the estate of someone who has recently passed away (let's call her Penelope). Penelope's estate includes 100 shares in The Next Big Thing Limited. When Penelope died those shares were worth £10,000. Six months after Penelope dies Virgil gets round to selling the shares. He is amazed to discover that The Next Big Thing Limited has launched the next new social media craze and the shares have rocketed in value. He sells them for £100,000. After deductions of sale costs and annual allowances the total gain to the estate on the sale of the shares is £78,000.
If the shares are sold before 6 April 2016
CGT will be payable on the £78,000 gain at the rate of 28%. The means that Virgil (as Penelope's personal representative) will need to pay HMRC £21,840 leaving £56,160 of the gain to pass to Penelope's beneficiaries in accordance with her Will.
If the shares are sold on or after 6 April 2016
If Virgil had waited to sell the shares until 6 April 2016, the £78,000 gain would be subject to the new CGT regime announced by the government in the March budget 2016. Under the new regime CGT will be charged at 20% rather than 28%. This is great news for the beneficiaries of Penelope's estate as the estate will only pay £15,600 in CGT and the beneficiaries will receive £62,400 of the £78,000 gain.
What if the money had been invested in property rather than in shares?
To provide her with an extra income during retirement (she had previously had an extremely successful career working for an international rescue organisation) Penelope bought a flat in London. The flat was rented out and Penelope used the rental income to fund her love of designer clothes. On her death Penelope's flat was worth £100,000 (a bargain for London). Six months after Penelope's death, Virgil puts the flat on the market and is delighted when it sells for £200,000 (still a bargain for London). After deductions of costs and any allowances the gain to Penelope's estate is £78,000.
Under the new CGT regime announced by the government, the £78,000 gain on Penelope's investment property will incur CGT at the rate of 28% regardless of whether it was sold before, on or after 6 April 2016. This means the beneficiaries will receive only £56,160 of the £78,000 gain from Penelope's flat, much less than they would have received if the money was held in shares rather than property.
If you are an executor of an estate and are considering selling shares or a property, there are ways of mitigating CGT, such as appropriating assets to a beneficiary. For further advice on CGT or assistance with the administration of estates please contact the Blake Morgan succession and tax team.