Probate Value and Capital Gains Tax: Why the Date-of-Death Figure Is Your Base Cost

Death is not a disposal for Capital Gains Tax. Whatever gain had built up during the deceased's lifetime is wiped out, and the personal representatives are treated as acquiring every asset at its market value on the date of death. That value is the probate value: the same Open Market Value figure reported for Inheritance Tax and in the probate application.

The effect is a step-up in base cost. A house bought for £60,000 in 1985 and worth £400,000 at death passes to the estate with a base cost of £400,000. If it is sold for £410,000, the gain is £10,000, not £350,000. The same applies to shares, jewellery, art, a classic car and every other chargeable asset.

This is why the probate valuation matters even in an estate with no Inheritance Tax to pay. The figure the executors report is the figure the estate, and later the beneficiaries, will be measured against.

It depends on who sells. If the personal representatives sell during the administration period, the gain is theirs, taxed at the rate applying to trustees and personal representatives, currently 24% on all assets. The estate has an annual exempt amount, currently £3,000, for the tax year of death and the two following tax years. Selling costs, including agent's and solicitor's fees, are deductible.

If the executors instead appropriate the asset to the beneficiaries and the beneficiaries sell, each beneficiary's gain is measured from the same probate value, but they use their own annual exempt amount and pay at their own rate, 18% or 24% for residential property depending on their income. A beneficiary who lives in the property may qualify for private residence relief. Where several beneficiaries share an asset that will be sold at a gain, appropriation before sale is often worth arranging.

Residential property gains are reported and paid within 60 days of completion through the UK property return, whether the seller is the estate or an individual. Other gains go on the estate's or the individual's Self Assessment return.

For Capital Gains Tax the base cost is the asset's market value at death. Where the estate filed a full IHT400 and HMRC agreed the value for Inheritance Tax, that value is "ascertained" and binds both sides for Capital Gains Tax as well. Where the estate was excepted and no Inheritance Tax value was agreed, the probate figure is only the executors' estimate, and HMRC is free to argue that the true market value at death was different when the asset is later sold.

In practice HMRC rarely disturbs a figure supported by a contemporaneous professional valuation. It is far more willing to question a round-number estimate, or an estate agent's appraisal that the executors themselves did not treat as reliable. An excepted estate with a valuable house is the situation where a RICS valuation earns its fee twice: once at probate, and again when the house is sold.

Executors sometimes lean towards a low house value on the theory that it reduces Inheritance Tax. In a non-taxable estate it reduces nothing, and it lowers the base cost for Capital Gains Tax. A house valued at £350,000 for probate and sold two years later for £420,000 shows a £70,000 gain; the same house valued accurately at £395,000 shows £25,000. At 24%, the low valuation has cost the estate around £10,800 in Capital Gains Tax to save no Inheritance Tax at all.

In a taxable estate the arithmetic runs the other way, because Inheritance Tax at 40% exceeds Capital Gains Tax at 24%. But a deliberately low value is not a strategy there either: HMRC's Valuation Office Agency reviews IHT405 figures against sales data, and a corrected value carries interest and possibly penalties. The right figure is the evidenced one.

Chattels sold for £6,000 or less are exempt from Capital Gains Tax, and where the proceeds exceed £6,000 the gain is capped at five-thirds of the excess. Cars are exempt altogether as wasting assets, as are most machinery and items with a predictable life of fifty years or less. Sets are treated as a single asset if sold to the same person, so splitting a pair of paintings across two buyers does not create two exemptions.

For the items that are chargeable, the base cost is again the probate value. An itemised contents valuation for form IHT407 gives each piece its own figure, which is what the estate needs if a single painting or ring is later sold for a substantial sum.

Where land is sold within four years of death for less than its probate value, or quoted shares within twelve months, the executors can claim to substitute the sale price for the probate value for Inheritance Tax, recovering the tax overpaid. If they do, the sale price also becomes the base cost for Capital Gains Tax, so there is no capital loss to set against other gains. The executors choose one or the other, and where the estate paid Inheritance Tax at 40% the relief is usually worth more than the loss.

No such relief exists for chattels. A painting valued at £20,000 for probate and sold for £12,000 produces an £8,000 capital loss for the estate, but the Inheritance Tax paid on £20,000 stays paid, unless the original figure was an estimate that can be corrected on the evidence of the sale.

Capital Gains Tax questions arise years after probate, often when a beneficiary sells. The estate papers should let anyone answer them.