Guidance for personal representatives on the reduction in the annual exempt amount for Capital Gains Tax

HM Revenue & Customs (HMRC) has announced that the annual exempt amount for Capital Gains Tax available to personal representatives (PRs) will be reduced from 6 April 2023.

What are the changes?

The current annual exempt amount is £12,300 for PRs.

For the 2023/24 tax year, the annual exempt amount will be reduced to £6,000 for PRs and individuals.

For the 2024/25 tax year and subsequent tax years, the annual exempt amount will be permanently fixed at £3,000 for PRs and individuals.

Capital gains tax rates for PRs and individuals

The following Capital Gains Tax rates apply:

• 20% for PRs and individuals on assets not including residential property (for example, shareholdings).
• 28% for PRs and individuals on a disposal of residential property.

Impact on personal representatives

It is estimated that for the year 2023/24, around 500,000 individuals and trusts could be affected by the reduction in the annual exempt amount.

The economic recovery, following the Covid-19 pandemic and subsequent increase in house prices, has led to the value of assets in estates increasing, with many exceeding the annual exempt amount and therefore potentially liable to Capital Gains Tax.

Impact and objectives of HMRC

The Office for Budget Responsibility has confirmed, in the 2022 Autumn Statement, that the changes to the annual exempt amount will have the following exchequer impact (£m):

According to the policy paper Capital Gains Tax: Annual Exempt Amount published on 21 November 2022, "this policy supports the government’s objective of putting the public finances on a sustainable path in a way that is fair, with everyone contributing a little and those on the highest incomes taking on a larger burden."

Important points for personal representatives to remember

• PRs can use the full annual exempt amount for the tax year in which the death occurred and the following two tax years. After that, there is no tax-free allowance against any gains during the administration period.
• Capital gains on assets held within a tax efficient wrapper, such as an ISA, will be unaffected (they are not liable to Capital Gains Tax or Income Tax). Do not forget that the ISA provider will close the ISA three years and one day after the deceased has died.
• PRs should review the values of the chargeable assets of an estate, particularly properties and shareholdings, on a regular basis. Obtain up to date valuations before selling the same to mitigate a capital gains tax charge.
• PRs should obtain advice from solicitors acting in the estate and/or a tax planning professional if the value of the assets have increased since the date of death, thus leading to a Capital Gains Tax liability. They can advise on the merits of 'appropriating' assets to beneficiaries, or shares of the same, in order to make use of more than one annual allowance for Capital Gains Tax.
• Charities are exempt from Capital Gains Tax and therefore 'appropriating' assets to charity beneficiaries should be reviewed as a matter of course when encashing chargeable assets.

How we can help

Please contact someone in our Charity Probate team if you would like further information in relation to the annual exempt amount or 'appropriating' assets.