Post-mortem tax planning: Capital Gains Tax - carry back of losses

Claimable up to 31st January following tax year of death.

It is common knowledge that capital losses for private clients can be carried forward. For this valuable feature of the tax system to be utilised though, losses must be reported before the end of four full tax years following the year the loss occurred. It is often assumed that losses cannot be carried back. However, in the specific situation of a loss in the tax year someone dies, losses made before their death may be carried back.

Of course, no capital gains tax (CGT) arises on death and the personal representatives are treated as acquiring the assets of the deceased at the market value upon death – typically, this is the same starting value for the purposes of calculating inheritance tax (IHT). Additionally, there is no CGT liability when those same assets are transferred from the personal representatives to the beneficiaries of the estate and each of those recipients are considered to have received those assets at the market value at the time of death for CGT purposes and IHT purposes.

In some situations, the personal representative may sell an asset during the process of administration of the estate. If so, in that capacity as personal representative, they will be subject to CGT – although, in this capacity they have the same annual exempt amount as an individual would in the year of death and, also, in the two years following.

There are other points to consider regarding CGT upon death that may impact the post-tax outcome.

If an asset of an estate is going to be disposed of, it may be better to transfer the asset to the recipients of the estate before disposal. This could be because there are multiple eventual recipients who each have unused annual exempt amounts. Some assets could be disposed of in the hands of the personal representatives to absorb their annual exempt amount and the remainder transferred out whereby the recipient’s annual exempt amount could be utilised. Note that personal representatives are chargeable at the higher rate of 24% only.

It is also possible that some recipients could be non-UK tax residents that do not pay UK CGT, so that even substantial gains in the hands of the personal representative may simply not be taxable if assets are transferred out to, effectively, non-taxpayers. Otherwise, because of their own income tax position, the recipients may be subject to lower rates of CGT than the personal representative.

Clearly, even post-death planning when winding-up an estate needs considerable thought, and is an important area on which to provide advice.

Read our report on Planning for the Great Wealth Transfer

This material is not tax, legal or accounting advice and should not be relied on for tax, legal or accounting purposes. Quilter Cheviot Limited does not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting adviser(s) before engaging in any transaction. Trusts, estate planning, taxation and inheritance tax advice are not regulated by the Financial Conduct Authority. Tax treatment depends on an individual's circumstances and may change in the future.