What to consider when it comes to CGT losses, including worked example.
Losses are always an area that requires consideration. The basic rules regarding capital gains tax are:
- no liability to capital gains tax arises on death. The personal representatives are treated as acquiring the deceased’s assets at the market value at the time of death
- no liability to capital gains tax arises on the transfer of assets from the personal representatives to the legatees. Each legatee is treated as having acquired the asset at market value at the time of death
- if the personal representatives sell an asset while administering the estate then they will be liable to capital gains tax although they are entitled to the same annual exempt amount as individuals for the year of death and the following two years. Any gain or loss arising on the disposal of the asset by the personal representative after the death is calculated by reference to the market value of the asset at the date of death.
Where an allowable loss is incurred by the deceased in the tax year of death, on disposals made before death, these losses are set off against chargeable gains in that tax year and any excess losses can be carried back and set against chargeable gains in the three preceding tax years. Chargeable gains accruing in a later year must be relieved before those of an earlier year. Any remaining unused losses cannot be carried forward and set off against gains made by the personal representatives or legatees.
Rose sells an asset on 1 May 2017 realising an allowable loss of £95,000. She then dies on 1 September 2017. Rose had no chargeable gains for 2017/18 but had chargeable gains (before the annual exemption) in 2016/17 and 2015/2016 of £55,000 and £75,000 respectively.
The 2017/18 allowable loss is carried back as follows:
Firstly to 2016/17 £ £
Chargeable gains 55,000
Loss carried back from 2017/18 43,900
Annual exempt amount 11,100
Taxable gain Nil
Loss from 2017/18 95,000
Loss utilised in 2016/17 43,900
Losses carried back 41,100
2015/16 £ £
Chargeable gains 75,000
Loss carried back 41,100
Annual exempt amount 11,100
Taxable gain 22,800
Loss brought back from 2017/18 41,100
Loss utilised in 2015/16 41,100
Losses carried back Nil
General points to consider
The following points are worth remembering:
- if an asset in an estate is to be sold it may be appropriate to consider transferring the asset to the legatee(s) before the sale occurs. The points to consider are that the legatee’s annual exemptions and the rates of capital gains tax payable by the legatee(s) compared to the personal representatives’ rate
- if there are a large number of legatees, each will be entitled to their own annual exempt amount
- some legatees (such as non-resident individuals and charities) may not be liable to capital gains tax
- even if legatees are subject to capital gains tax they may be subject to a lower rate of capital gains tax than the personal representatives
- inheritance tax relief may be available on certain types of assets, therefore the person who owns the asset(s) may consider not selling such assets if he/she considers his/her death may be imminent.
Article from ACCA In Practice