I have been asked to try and settle a difference of opinion between colleagues regarding the following scenario:
Deceased owns a 50% undivided share in a property. For IHT purposes, the value is discounted. The property is sold and the estate receives 50% of the proceeds and a capital gain is made.
Most of my colleagues say that the acquisition cost for CGT is an arithmetical half share; seems fair to me when they get an arithmetical 50% of the proceeds. However another colleague is of the opinion that the acquisition value is the discounted value. That doesn’t seem fair to me as it could result in CGT being payable even though the property has not increased in value.
I have looked at the CGT manual which says (regarding acquisition values): “If the deceased only held a share in the property then a discount should still be made”. If this bis the case, I assume HMRC’s view is that the share the executors received wasn’t worth 50% of the market value of the property, therefore because they received 50% of the actual proceeds they have actually made a gain even if the property itself has not increased in value.
I would agree with your colleague that (in most cases) the acquisition value is the discounted value. From a real world point of view, unless the property were in the process of being sold, a valuer will apply a discount as an unconnected purchaser would not pay the arithmetic percentage of the value of the whole.
It does not apply to your situation but if the property were sold at a loss and a claim made for IHT purposes to reduce the value of the asset to the sale value (also applies to all other property sold), then in that case the IHT value would equal the sale proceeds.
You should read the subsequent sections in HMRC’s CGT manual about values being ascertained for IHT purposes, but I suggest you start with CG32210: Valuation Of Assets At Death: Only One Valuation For IHT And CGT, which states
The value of an asset at the date of death may be needed in order to compute the Inheritance Tax liability of the estate, see CG30300 and Appendix 4. It may also be required for Capital Gains (CGT or CTCG) purposes as an acquisition cost if either the personal representatives or the legatee subsequently dispose of the asset. Because the valuation is used in arriving at the liability on death under both taxes it is important to ensure that the same value is used in dealing with each tax. Also it is important that arguments about the value of the asset are not duplicated. This result is achieved by TCGA92/S274. This provides that where
• the value of an asset is required for the purposes of both capital gains and inheritance tax
and
• that value has been `ascertained’ for the purposes of Inheritance Tax
that value is also to be used as the acquisition cost for Capital Gains purposes, except in certain cases where CG32238 (extra nil-rate bands) applies.
I’ve had this and HMRC obstreperously insisted on the acquisition value of the deceased’s half share being the value I’d declared for IHT, so there was no advantage in the discount for IHT.
I go with the “minority” view, however unfair it may seem.
I have challenged HMRC on this before and they have pointed out that it
is no different from the position where the share of the property has
been ascertained for IHT, so that such value is automatically adopted
for CGT - s.274 TCGA 1992.
If, say, a jointly owned property is valued at £1 million and
subsequently sells for £990,000, a CGT gain of £40,000/£65,000 arises
before allowable expenses (depending upon the discount allowed). Whilst
this does seem unfair, I can follow the logic.
The issue raises a thought in relation to the satisfaction of NRB by the
transfer of a share of the (former?) matrimonial home. Most executors
appropriate an arithmetic share of the property - 50% of a property
valued at £650k for a legacy of £325k. Should they be seeking valuation
advice on the proportion of the property that would equate to a value of
£325k. This could be a 60% share, or even higher. Should the value for
appropriation reflect the principle for a valuation for CGT?
Carlton Collister’s reply is my view, though I would just make the point that the value for IHT is only definitive for CGT if it has been “ascertained” for the purposes of IHT, meaning "ascertained by a process of being considered and agreed by the Valuation Office Agency for HMRC or determined by tribunal ". A value put forward by executors where there is no IHT to pay (for example due to spouse relief) will not be ascertained. This then opens the possibility that the CGT acquisition cost is different.
But I certainly agree the principle that the value of a part share (and thus the acquisition costs for the inheritor) is less than the arithmetical proportion of the open market value of the whole. So yes there can be an uplift on sale. So sorry Lorna, fair or not, that how it works!
It seems correct to me that the base cost is the appropriate discounted value.
Regarding Paul’s last comment, on the basis of appropriation at the property’s value at the date of appropriation then this value should take into account any discount. Thus, for example, with respect to the nil rate band discretionary trust, with a NRB of 325k and a property worth 650k at appropriation then settlement of a 50% interest will “short change” the trustees as they will receive an interest worth say only 300k.
However, it may be that between date of death and date of appropriation the property’s value may have increased such that a 50% discounted share equates to 325k or it may be necessary to settle less than 50%.
But this is still good news for the taxpayer, isn’t it? The 10-15% discount is taxed at 28% rather than 40%, and may have CGT exemptions available to reduce it. if the Estate/jointly owned asset is not taxable to IHT, do not claim the discount.