Yahoo Finance What capital gains tax will be due when my daughters inherit my flat?
Q I am an elderly widower. When I die I expect to leave my entire estate to my three daughters.
Part of that estate is a flat that I bought in 1997 for £68,000 but which is now worth about £250,000. What capital gains tax would be due – if any – when my daughters inherit? They will also inherit the family home, which has a current value of about £550,000.
I believe they will benefit from the tax rule that applies the tax allowance of myself and also of my late wife who died five years ago. I don’t want to leave them a tax bill as they will be in no position to deal with it. They are going to need everything I leave them to simply be housed and get by. I am quite concerned and would appreciate your advice.
AB
A There is no capital gains tax (CGT) when an asset such as your flat is inherited but there might be a bill if your daughters decided to sell it. However, it is likely to be a small one because the taxable gain (or loss) will be the difference between the flat’s value on the date of your death (so not its value when you acquired it) and what they managed to get for it less estate agent fees and legal costs. For there to be a tax bill, the taxable gain would have to be more than £36,900, which is three times the £12,300 CGT exempt amount that each of your daughters is entitled to in the 2020-21 tax year (assuming they have no other gains to set against the exempt amount).
When it comes to inheritance tax, you are right that your daughters will be able to set both the inheritance tax nil-rate band in place at the time of your death and the unused percentage of the nil-rate band that applied when your wife died.
For deaths occurring in the 2020-21 tax year, each person can leave £325,000 before tax. If your wife left everything to you on her death, you can leave double the nil-rate band, so £650,000 of your estate would be tax free.
If she left most of her estate to you but used up part of the nil-rate band – by making gifts to your daughters, for example – you can only add the remaining percentage of the nil-rate band, based on the threshold in place at the time of her death (which in the 2016-17 tax year happens to be the same as now).
So when my father died, for example, he left everything to my mother but made gifts of £20,000 to my niece and nephew. The nil-rate band was £312,000 when he died, so the percentage remaining that is available to transfer when my mother dies is 93.59%.
In addition to inheriting the unused portion of your wife’s nil-rate band, because you are leaving the family home to your daughters, your estate can also claim an extra £175,000 tax free (in this tax year) in the form of the “main residence nil-rate band” but only if your entire estate is worth less than £2m. After that, the tax-free amount is tapered.
You can also inherit your wife’s unused main residence nil-rate band despite the fact that it did not exist until 6 April 2017.
On a practical note, to be able to claim to transfer any unused inheritance tax nil-rate band, your daughters will need to fill in form IHT216 from HM Revenue & Customs (HMRC). For a claim to be valid, the form has to be accompanied by the following documents: your wife’s death certificate; your marriage certificate; a copy of your wife’s estate’s grant of representation; and her will (together with any deed of variation). It may be an idea to put all those documents in the same place as your will and tell your daughters where to find them. To claim the main residence nil-rate band available to both your estate and your wife’s, your daughters will have to fill in forms IHT435 and IHT436.
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