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What is Capital Gains Tax: How is My Inheritance Affected?

By: J.A.J Aaronson - Updated: 8 Jan 2015 | comments*Discuss
 
Capital Gains Tax Cgt Inheritance Cgt

Capital Gains Tax and inheritance are two complex areas with which many, if not most, people will have to deal with at some point during the course of their life. All too often people forget that there are frequently still tax issues to be dealt with after a death, and Inheritance Tax (IHT) is not the only such issue. Depending on the size and nature of the deceased individual’s estate, you may also have to deal with Capital Gains Tax liabilities that can significantly change the value of your inheritance.

Capital Gains Tax is levied when you make a ‘gain’ as a result of a disposal of an asset. You can dispose of an asset in many ways; for example by selling, exchanging, or giving it away. Capital Gains Tax (CGT) applies to the disposal of many different kinds of assets, including almost all personal belongings with a value of £6,000 or more at the point of disposal. There is, however, an exemption for your main home.

How is CGT calculated?

Capital Gains Tax is calculated on an annual basis, in accordance with the tax year. Each individual has a total allowance every year for capital gains; this means that you can make a certain amount in capital gains each year without being taxed. The allowance for 2009-10 is £10,100. Above this, though, all gains are taxed at a rate of 18 per cent once certain allowable costs, 11060 and deferrals have been taken into account.

Many people dispose of assets they have inherited very soon after the death of the individual in question. For example, if you inherit a second house you may well choose to sell it on and take the money. In cases like these, you would likely incur a Capital Gains Tax liability. Such a liability could reduce the value of your inheritance by as much as 18 per cent.

When does a CGT bill occur?

It is important to note that Capital Gains Tax does not arise at the point of inheritance, but only when the inherited assets are sold or otherwise disposed of. At this point the CGT liability is calculated with regard to the difference between the value of the asset at the time of death and its value at the time at which it is disposed of. In some ways a drop in the market value of the asset would, therefore, be beneficial as it would result in a lower tax liability. Indeed, if the asset is worth less at the point of disposal than it was at the point of inheritance, you would record a loss rather than a gain. This loss could be used to reduce a gain made on another asset during that tax year.

Capital Gains Tax must be reported to your Tax Office by October 5th following the end of the tax year in which the gain was made. If a liability arises it must usually be paid by self assessment.

Capital Gains Tax can have a significant effect on the value of your inheritance. As such, if you think a CGT liability might arise you may wish to contact an independent financial advisor in order to get personalised advice on reducing your tax bill.

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Hello. I'm hearing-impaired. I live in Maryland. I'm the beneficiary of my deceased father's estate (in NJ). I do not know how much I'd be receiving the inheritance money but it should not be over $30,000. My sister who is the Executor advised me about the capital gain because I have a house. I still pay mortgage and have debts. I'd like to know if the inheritance money would affect the capital gain and if so, how does it affect the capital gain? What should I do when I receive the inheritance money to avoid paying the tax? Should I put it in my IRA or what? Appreciate your reply. Thanks.
Shar - 8-Jan-15 @ 3:00 PM
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