Do I have to pay CGT because I undervalued a house for probate?
by Heather Rogers for This Is Money · Mail OnlineI am in the process of selling my late father's house. I am one of three sons who will get an equal share. I am the executor of the estate.
When I filled out the paperwork for probate and it asked about values I thought it was talking about this for inheritance tax purposes.
I had estimated the value of my father's house at £190,000 and he had approximately £23,500 in the bank so I applied for probate at £213,500.
As this was under the inheritance tax threshold I didn't think it was a problem but in hindsight I realise I should have given a more accurate, higher figure.
I got probate in May and instructed an estate agent who valued the house at £220,000, and I am selling it hopefully for £218,000.
However, I have spoken to HMRC and they say that a gain would have been made of £28,000 and that I would need to declare this within 60 days of sale.
I have told HMRC that the house price I gave for probate was based on an estimate for inheritance tax and that the true 'market value' should have been £220,000 and so no CGT would be due.
I said they must use the £220,000 estate agent figure.
I have tried contacting the Probate Service to amend the grant of probate. They want some paperwork from HMRC but have not stated exactly what.
Hopefully the sale proceeds next week. Is there capital gains tax to pay and if so what allowances and deductions can be used to lower this amount? If not, how can I challenge this?
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Heather Rogers replies: I am sorry to hear of your bereavement. Your situation is unfortunately not uncommon.
It highlights two very important points which anyone reading this who is acting as an executor, or might do so in future, should bear in mind.
First, it shows the value of taking professional advice before managing an estate and during the process.
Second, it is vital to ensure you obtain accurate valuations rather than estimating them, however small the estate - that is your duty as an executor.
How much is inheritance tax?
Tax of 40 per cent is typically levied on a deceased person's assets worth over and above £325,000, which is called the nil rate band, explains Heather Rogers.
Many people are allowed to leave a further £175,000 worth of assets without them becoming liable for inheritance tax, if their home forms part of their estate and they leave it to direct descendants.
That means children, including adopted, step or fostered, and those children's linear descendants.
This extra sum is what is called the residence nil rate band, and it is available to claim on deaths on or after 6 April 2017.
Both protected amounts or 'bands', adding up to £500,000 per person, can be transferred to a surviving spouse or civil partner if unused on the death of the first spouse.
Even in small estates, complexities arise, as I will explain.
Let's look at the role of an executor, getting valuations on assets, and how capital gains tax can apply to an estate, before turning to the specifics of your situation.
What does an executor do?
In simple terms, when someone dies, the executors are responsible for valuing the assets at the date of death and also dealing with the administration of the estate, collecting monies owed to it and paying bills owed by it and selling assets.
They should get the best price they can for the sale of assets, within reason.
They are responsible for paying any inheritance tax due and then once that has happened, they apply for a grant of probate which gives them authority to administer the estate and distribute the assets to the beneficiaries.
This is called the period of administration and runs from the date of death to the date when all the assets have been distributed.
How should you value the assets?
It is always advisable to obtain a formal valuation by a specialist, for example via the Royal Institution of Chartered Surveyors when it comes to property.
HMRC can challenge a valuation submitted to them and if so will ask a district valuer from District Valuer Services, a specialist arm of the Government, to review the valuation.
There are two usual situations:
- The asset that is being valued at the date of death for probate purposes is being passed directly to a beneficiary;
- The asset that is being valued at the date of death for probate will be sold during the period of administration.
If the asset is being passed directly to a beneficiary, for example a property, they will acquire the asset at the value accepted for probate, which is deemed to be market value at the date of death.
If the beneficiary then sells the asset later on, the probate value will be their 'acquisition cost' for the purposes of calculating any gain made on a future sale.
If the asset is being sold during the administration period, it can be sold for more or less than the probate value. This could be because:
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- The asset has increased or decreased in value;
- An incorrect valuation was used for probate purposes.
What if the asset has increased in value during the period of administration?
If the asset has increased in value during the period of administration, and so sells for a higher amount, then there will be a capital gain.
The executors will have to report this and pay the tax (within 60 days of completion for residential property).
The estate can offset the costs of disposal, and its own capital gains tax free allowance against the profit.
What if the asset has decreased in value during the period of administration?
If it has decreased in the value during the period of administration there will be a capital loss available for the estate to offset against any other capital gains made during the period of administration.
If inheritance tax has been paid on the higher probate valuation, then section 191 of the Inheritance Tax Act 1984 will apply.
This provides that where inheritance tax has been paid on a higher valuation, that the lower sale value of the asset can be used for probate.
A claim for relief can be made. and therefore there is potentially an inheritance tax refund due to the estate.
What if an incorrect valuation was used for probate?
This is where matters can become complex!
If the asset sells for less than the probate valuation because this valuation was too high on estates attracting inheritance tax, then a claim for relief could be made as above.
How does CGT work?
Capital gains tax is payable on the profits from the sale of an asset - what you sell it for, less what you paid for it.
Depending on the asset there may be certain reliefs available and each person has a capital gains tax allowance to offset against their gains.
This reduced to £3,000 in April, after being cut to £6,000 in April 2023. Before that, it was £12,300.
If an asset was transferred to you as a gift, then the value at transfer will be the valuation for acquisition.
When the asset is left to you through a will, then the probate value will be the value you are deemed to have acquired it for.
You can deduct costs of acquisition and disposal if relevant - the estate agent's and solicitor's fees on sale, for example.
You can also deduct costs where you have spent money and have added value to the asset.
Capital gains rates are explained here.
However, where an asset sells for more than the probate valuation because it was too low, then substituting the market valuation would be nonsensical as more inheritance tax would be due on the estate and at a higher rate than the CGT.
The only time there is an issue is where the estate is not chargeable to inheritance tax.
Therefore, substituting the higher sale price for the probate valuation would be an attractive proposition, as it would mean no capital gains tax would be payable.
Unfortunately, here a case called Stonor & Anor (executors of Dickinson dec’d) v IR Commrs (2001) Sp C 288 comes into play.
This concerned an estate which didn’t have any inheritance tax to pay, but did have capital gains tax to pay due to the much higher sale price of the properties than the valuation that had been ascertained for probate purposes.
The decision, released on 25 October 2001, stated that as no inheritance tax was due, no relief under section 191 of the Inheritance Tax Act 1984 could be claimed. Therefore, capital gains tax was payable.
How will this affect your father's estate?
In your case, your incorrect lower valuation of your father’s property falls within the circumstances where no inheritance tax would be payable with either the sale price or the incorrect probate valuation which you ascertained.
You would therefore not be able to claim relief under section 191 of the Inheritance Tax Act 1984 as no inheritance is payable, and so the circumstances of Stonor & Anor v IR Commrs 2001 would apply to your situation.
What you could have done, before the property was sold, was to apply for a Deed of Appropriation where the estate sells the property on behalf of the beneficiaries.
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This would have meant that each of the beneficiaries could have used any of their unused capital gains tax allowances for 2024/25 against the profit, instead of just the estate’s allowance.
Depending on your own individual circumstances, you could have paid a lower rate of CGT on the profit.
Your question suggested you had almost completed the sale of your father's house.
If the sale has not yet gone ahead, you could still consider a Deed of Appropriation - but do get professional advice in that case.
If the sale of your father's property has now happened, make sure you declare the capital gain to HMRC within 60 days of completion.
You can find all the rates and allowances for capital gains tax here.
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Heather Rogers, founder and owner of Aston Accountancy, is our tax columnist.
She is ready to answer your questions on any tax topic - tax codes, inheritance tax, income tax, capital gains tax, and much more.
If you would like to ask Heather a question about tax, email her at taxquestions@thisismoney.co.uk.
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