## **Learning Outcomes**

This article outlines beneficiaries’ liability to Capital Gains Tax (CGT) on inherited assets, including:

- when CGT liability arises and disposal events
- the distinction between disposals by personal representatives (PRs) and disposals by beneficiaries
- probate value as the acquisition/base cost and adjustments from post‑mortem IHT reliefs
- steps in calculating chargeable gains, allowable expenses, enhancement expenditure, and capital losses
- applicable CGT rates and the annual exempt amount, including higher residential property rates
- key reliefs and exemptions: Principal Private Residence Relief (PPR), Business Asset Disposal Relief (BADR), and no gain/no loss transfers between spouses or civil partners
- special cases: partial disposals, mixed‑use assets, chattels, international disposals, and valuation challenges
- reporting/payment timelines on UK residential property (60‑day returns) and when self‑assessment applies
- deeds of variation and disclaimers within two years of death and their CGT “read‑back” effect
- interaction between inheritance tax and CGT
- common pitfalls relevant to the SQE1 exam

## **SQE1 Syllabus**

For SQE1, you are required to understand the tax implications for beneficiaries inheriting assets, especially regarding Capital Gains Tax (CGT) and income tax during estate administration, with a focus on the following syllabus points:

- the point at which CGT liability arises for beneficiaries inheriting assets
- the use of probate value as the acquisition cost for CGT purposes
- the calculation of CGT on disposal of inherited assets, including allowable deductions and reliefs
- the interaction between inheritance tax and CGT
- the main exemptions and reliefs available to beneficiaries
- practical issues such as partial disposals, mixed‑use assets, and valuation
- differences between PR disposals and beneficiary disposals (and consequences for CGT)
- the 60‑day UK residential property reporting/payment regime and self‑assessment
- spousal/civil partner no gain/no loss transfers and their planning impact
- treatment of chattels, wasting assets, and capital losses

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. When does a beneficiary become liable to Capital Gains Tax on an inherited asset?
2. What is the significance of the probate value for CGT purposes?
3. Name two types of relief that may reduce a beneficiary’s CGT liability on disposal of inherited property.
4. True or false? CGT is charged at the point a beneficiary inherits an asset from an estate.

## **Introduction**

Beneficiaries inheriting assets during estate administration need to be aware of their potential liability to Capital Gains Tax (CGT). While inheritance itself does not trigger CGT, a taxable gain may arise if the beneficiary later disposes of the inherited asset. The calculation of any gain uses the asset’s probate value as the acquisition cost. Understanding when CGT applies, how to calculate it, and what reliefs or exemptions are available is essential for SQE1.

Equally important is distinguishing who is making the disposal. A sale by the PRs during administration can create a CGT liability on the estate, whereas a sale by the beneficiary after receipt can create a liability on the beneficiary. In either case, there is no CGT on death itself, and a distribution/assent of an asset to a beneficiary is not treated as a disposal by the PRs. For UK residential property, separate accelerated 60‑day reporting/payment rules can apply on disposal by individuals (including beneficiaries), alongside the normal self‑assessment deadlines.

> **Key Term: disposal**
> A disposal is any event where ownership of an asset is transferred, including sale, gift, or exchange.

## Beneficiaries and Capital Gains Tax on Inherited Assets

### When Does CGT Liability Arise?

CGT is not charged when a beneficiary receives an asset from an estate. Instead, liability arises only when the beneficiary disposes of the inherited asset—by selling, gifting, or otherwise transferring it. Until that point, no CGT is due.

Disposals by PRs versus beneficiaries:

- If PRs sell an estate asset during the administration period, any CGT liability rests with the PRs (subject to their allowances and rates). The beneficiary then receives cash and has no CGT exposure on that sale.
- If PRs transfer (assent) the asset to the beneficiary and the beneficiary sells later, any gain or loss compared to the probate value is the beneficiary’s.

Gifts by beneficiaries:

- A gift of an inherited asset is a disposal at market value for CGT. Unless a specific deferral relief applies (e.g., certain business assets or gifts into qualifying trusts), the donor‑beneficiary may incur an immediate CGT charge.

> **Key Term: probate value**
> The market value of an asset at the date of the deceased’s death, used as the acquisition cost for CGT when the asset is inherited.

### Probate Value as Acquisition Cost

When a beneficiary inherits an asset, the asset is revalued for tax purposes at the date of the deceased’s death. This value, known as the probate value, becomes the beneficiary’s acquisition cost (base cost). Any gain is calculated by comparing the disposal proceeds with this probate value.

Points to note:

- The death uplift removes gains accrued during the deceased’s lifetime: the beneficiary starts with a clean slate at the probate value.
- Where the PRs have made a successful post‑mortem IHT relief claim (e.g., on quoted shares sold at a loss within 12 months of death or land/buildings within the relief window), the adjusted value used for IHT becomes the CGT base cost.
- Even if no IHT was payable (for example, assets passed to a spouse or charity), the beneficiary’s base cost is still the market value at the date of death. Where an IHT value has been formally ascertained with HMRC, that agreed value is used for CGT.

### Calculating the Chargeable Gain

To calculate the gain on disposal:

1. Start with the amount received on disposal (sale price or market value if gifted).
2. Deduct the probate value (acquisition cost).
3. Deduct allowable expenses (e.g., legal fees, agent’s fees, and costs of improvements).
4. The result is the chargeable gain, which may be reduced by reliefs or exemptions.

> **Key Term: allowable expenses**
> Costs that can be deducted from the disposal proceeds when calculating a chargeable gain, such as selling costs or capital improvements.

Allowable expenses commonly include:

- incidental costs of acquisition or disposal (e.g., agent’s commission, conveyancer’s fees, valuation fees directly related to the transaction, stamp duty land tax on acquisition)
- enhancement expenditure: capital improvements reflected in the asset at the time of disposal (not routine maintenance or repairs)
- costs incurred to establish, preserve, or defend title to the asset

Losses:

- If disposal proceeds are less than the base cost plus allowable expenses, a capital loss arises. Current year losses must be set against gains; excess losses are carried forward for set‑off against future gains.

Shares and securities:

- If only part of a shareholding inherited is sold, apportion the probate value and incidental costs to the part disposed. The averaging/pooling rules apply in detailed computations; for exam purposes, apply a fair apportionment by quantity where appropriate unless told otherwise.

### CGT Rates and Annual Exempt Amount

The chargeable gain, after deducting any reliefs or exemptions, is taxed at the beneficiary’s applicable CGT rate. The rate depends on the beneficiary’s income tax band and the type of asset:

- gains within the basic rate band are charged at the lower CGT rate
- gains in the higher/additional rate bands are charged at the higher CGT rate
- gains on residential property (not fully covered by PPR) attract higher CGT rates than most other assets

Each individual also has an annual exempt amount so only net gains above this threshold are taxed. Thresholds and rates change from time to time; use figures provided in the question.

Administration note:

- Individuals disposing of UK residential property that gives rise to CGT must generally file a UK property CGT return and pay any CGT on account within 60 days of completion. Any balancing amount is settled via the self‑assessment return by 31 January following the tax year.

### Common Reliefs and Exemptions

Several reliefs may reduce or eliminate CGT liability:

- **Principal Private Residence Relief (PPR):** If the inherited property becomes the beneficiary’s only or main residence, some or all of the gain may be exempt. The final nine months of ownership are treated as a period of deemed occupation, even if the property is not occupied then.
- **Business Asset Disposal Relief (BADR):** On qualifying disposals of business assets (e.g., shares in a trading company meeting the conditions), the CGT rate may be reduced to 10% (subject to a lifetime limit and qualifying criteria).
- **Annual Exempt Amount:** Each individual has a tax‑free allowance for gains each tax year.
- **Spouses and civil partners:** Transfers between spouses/civil partners living together are on a no gain/no loss basis; the recipient takes over the transferor’s base cost (here, the probate value if received from an estate). This can be used to share future gains and use two annual exempt amounts.
- **Hold‑over (gift) relief:** Available on certain gifts of business assets or gifts into qualifying trusts; it defers the gain into the recipient’s base cost, reducing or removing the immediate charge on the donor.

> **Key Term: Principal Private Residence Relief**
> A relief that exempts all or part of the gain on disposal of a property used as the owner’s main residence.

Practical points:

- PPR attaches only to the beneficiary’s period of ownership and occupation (starting at death). Occupation by the deceased does not count for the beneficiary’s PPR.
- Chattels: gains on wasting chattels (life ≤ 50 years) are generally exempt; gains on non‑wasting chattels can be exempt where consideration does not exceed the statutory limit (commonly tested as £6,000 historically—use figures given in the question).

### Special Situations

#### Partial Disposals

If only part of an inherited asset is disposed of (e.g., some shares from a larger holding, or one co‑owner sells a fractional interest in land), apportion the probate value and allowable expenses to calculate the gain attributable to the part disposed. For land with part disposals, apply a just and reasonable apportionment consistent with the facts provided.

Co‑beneficiaries:

- Where siblings inherit a property in undivided shares, each has their own base cost for their share. If one buys out the other, the seller may realise a gain compared to their probate‑value share; the buyer’s base cost for the acquired extra share becomes the price paid.

#### Mixed-Use Assets

Where an inherited asset is used partly as a residence and partly for another purpose (e.g., a shop with a flat above), the gain must be split between the different uses. Residential portions may attract residential rates and (if conditions are met) PPR; business/non‑residential parts are taxed at non‑residential CGT rates.

#### Valuation Issues

Assets that are unusual or difficult to value (e.g., artwork, collectibles) may require a professional valuation both at the date of death and at disposal. Where IHT values have been formally agreed with HMRC (ascertained), those values feed into CGT base costs. Post‑mortem IHT reliefs that alter the IHT value (e.g., share loss relief or land/buildings relief) also alter the CGT base cost correspondingly.

#### Spouses and Civil Partners

Transfers between spouses/civil partners living together take place at no gain/no loss for CGT. For inherited assets, this allows simple ownership rebalancing before an external sale to:

- use two annual exempt amounts
- access unused basic rate band for lower CGT rates
- improve PPR coverage if both meet occupation conditions

A later third‑party sale is computed against the original probate value (as carried through to the transferee).

#### Chattels and Wasting Assets

Inherited personal possessions may be exempt from CGT:

- wasting chattels (predictable useful life ≤ 50 years) are generally exempt
- certain non‑wasting chattels have an exemption where consideration does not exceed the statutory limit (commonly seen as £6,000 in past years); exam questions will give current thresholds

Antique cars used as passenger vehicles are usually exempt as wasting chattels. Always check asset type against current rules.

#### Deeds of Variation and Disclaimers

Within two years of death, a beneficiary can:

- vary their entitlement by deed so that, for IHT and CGT, the variation is “read back” to the deceased (if the appropriate statements are made), avoiding a disposal by the original beneficiary; or
- disclaim an entitlement altogether, which (if done correctly before any benefit is accepted) is not a disposal for CGT; the property passes as if never vested in the disclaiming beneficiary

These tools can be used to direct assets to a spouse, charity, or trust without triggering beneficiary‑level CGT.

### Interaction with Inheritance Tax

Inheritance Tax (IHT) is charged on the value of the deceased’s estate at death, while CGT is charged on the beneficiary’s gain when disposing of the asset. To prevent double taxation on the same rise in value:

- no CGT arises on death itself, and
- the probate value is used as the beneficiary’s acquisition cost (wiping out gains accrued during the deceased’s lifetime).

If PRs claim post‑mortem IHT reliefs (e.g., for sales of quoted shares within 12 months at a loss or land/buildings within the statutory window), the IHT‑adjusted value becomes the CGT base cost for the PRs and, where appropriate, recipients.

### International Aspects

Non‑UK residents can be liable to UK CGT on disposals of UK land (residential and commercial) and interests deriving value from UK land. Reporting and payment deadlines mirror the UK 60‑day regime for residential property where applicable. Double tax treaties and the remittance basis (for UK resident non‑domiciled individuals) can affect overall liability and timing. Conversely, UK residents disposing of overseas assets may face foreign tax; relief under double taxation arrangements or unilateral relief may be available.

### **Worked Example 1.1**

A beneficiary inherits a house valued at £350,000 at the date of death. Two years later, they sell the house for £400,000, incurring £5,000 in estate agent and legal fees. What is the chargeable gain for CGT?

> **Answer:** The gain is £400,000 (sale price) minus £350,000 (probate value) minus £5,000 (expenses) = £45,000. The beneficiary can also deduct the annual exempt amount before calculating CGT due.

### **Worked Example 1.2**

A beneficiary inherits 2,000 shares valued at £10 each (£20,000 total) at the date of death. They sell 1,000 shares for £15 each (£15,000 total), incurring £200 in broker fees. How is the gain calculated?

> **Answer:** The acquisition cost for 1,000 shares is £10,000 (1,000 × £10). The gain is £15,000 (sale proceeds) minus £10,000 (cost) minus £200 (fees) = £4,800. The annual exempt amount may further reduce the taxable gain.

### **Worked Example 1.3**

A beneficiary inherits a property used as both a shop (60%) and a flat (40%). The probate value is £500,000. The property is sold for £600,000. How is the gain apportioned?

> **Answer:** The total gain is £100,000. £60,000 is attributable to the shop (taxed at standard CGT rates), and £40,000 to the flat (may qualify for Principal Private Residence Relief if used as the beneficiary’s main home).

### **Worked Example 1.4**

A beneficiary inherits a house at a probate value of £300,000. They immediately move in and live there as their only home for three years, then sell for £360,000 incurring £3,000 selling costs. How much of the gain is chargeable?

> **Answer:** Gain before reliefs: £360,000 − £300,000 − £3,000 = £57,000. If the property was the beneficiary’s only or main residence throughout their ownership, PPR exempts the whole gain. No CGT is due.

### **Worked Example 1.5**

A beneficiary inherits company shares with a probate value of £100,000. Before selling, they transfer half the holding to their spouse (both live together), then both sell their respective halves for a total of £130,000, incurring £600 total costs. How is CGT computed?

> **Answer:** The inter‑spouse transfer is no gain/no loss: the spouse’s base cost for the half transferred is £50,000. On sale, combined proceeds £130,000 less costs £600 give £129,400. Base costs total £100,000. Combined gain £29,400 can be split so each reports gains on their half (approximately £14,700 each) and can use their own annual exempt amount and rate bands.

### **Worked Example 1.6**

A beneficiary inherits an antique table (a non‑wasting chattel). Probate value £4,000. It is later sold for £5,500, incurring £100 costs. Is there any CGT?

> **Answer:** Where disposal consideration for a qualifying chattel does not exceed the statutory limit (historically £6,000), the gain is exempt. On the figures given, no CGT is due.

### **Exam Warning**

> For SQE1, remember that CGT is not charged when a beneficiary inherits an asset, but only when the asset is later disposed of. Do not confuse the date of inheritance with the date of disposal for CGT purposes.

Common pitfalls:

- Using the deceased’s original cost instead of the probate value as base cost.
- Ignoring that a sale by PRs triggers estate‑level CGT (not beneficiary‑level CGT), whereas a post‑assent sale is the beneficiary’s.
- Forgetting the 60‑day UK residential property reporting/payment requirement.
- Assuming PPR applies because the deceased lived there; the beneficiary must satisfy PPR conditions during their ownership.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Beneficiaries are not liable to CGT when they inherit, but only when they dispose of the inherited asset.
- The probate value at the date of death is used as the acquisition cost for CGT calculations.
- A distribution/assent of an asset to a beneficiary is not a disposal for PRs; PR sales are taxed on the estate, beneficiary sales are taxed on the beneficiary.
- The chargeable gain is calculated by deducting the probate value and allowable expenses from the disposal proceeds.
- Reliefs such as Principal Private Residence Relief, Business Asset Disposal Relief (where relevant), inter‑spouse no gain/no loss, and the annual exempt amount may reduce or eliminate CGT liability.
- Partial disposals and mixed‑use assets require apportionment of acquisition cost and gain.
- Post‑mortem IHT reliefs (e.g., for quoted shares or land) can reset the CGT base cost to an adjusted value.
- UK residential property disposals by individuals can require a 60‑day CGT property return and payment on account.
- Deeds of variation/disclaimers within two years can be effective for CGT “read‑back”, avoiding a disposal by the original beneficiary.

## **Key Terms and Concepts**

- disposal
- probate value
- allowable expenses
- Principal Private Residence Relief

Income Tax and Capital Gains Tax during estate administration - Beneficiaries' liability to Capital Gains Tax on inherited assets