Capital gains tax on death and foreign property
The capital gains tax (CGT) uplift on death in s62(1) of the Taxation of Chargeable Gains Act 1992 (the Act) is based on the premise that there should generally be no CGT charge where an event is chargeable to inheritance tax.
The uplift applies to ‘all assets of which a deceased was competent to dispose’. Section 62(10) of the Act defines this as including all assets that:
1. a person could have disposed of by his will assuming:
- the individual was of full age and capacity;
- the individual was domiciled in England; and
- that all the assets were situated in England; and
2. the individual’s severable share of any asset in which the interest held immediately before death was held as a beneficial joint tenant.
Under English law, the law applying to the devolution of assets depends on the domicile of the deceased and where the assets are situated.
In many jurisdictions immovable property must pass in accordance with local statutory provisions that restrict testamentary freedom. This appears to mean that a deceased was not ‘competent to dispose’ of such assets.
However, the definition of ‘assets of which the deceased is competent to dispose’ requires us to assume that the deceased was domiciled in England and that the assets were all in England. On those assumptions a deceased could have dealt with such assets in the will. Therefore all assets devolving under foreign law will benefit from s62(1) of the Act deeming (a) there to be no disposal by the deceased and (b) the acquisition by the personal representative or legatees to be at probate value.
This is illustrated in the following examples:
Example 1: CGT uplift on English property
Mrs G is resident, ordinarily resident and domiciled in England at the date of her death. She owns chattels, shares, a half interest in a plot of land with her sister, and a half share in the matrimonial home.
The half interest in the plot of land is held by her and her sister as tenants in common, but the half share in the matrimonial home is held by her with Mr G, as joint tenants. She has a small balance to her credit at her bank.
Mrs G can use her will to decide who receives all of her assets, except her interest in the matrimonial home.
This will automatically pass to Mr G, as the surviving joint tenant. Even if she purported to pass this in her will, that provision would be ignored.
All her assets, including her joint-tenant holding in the matrimonial house, are assets she was ‘competent to dispose’ of for CGT purposes. On her death:
- There will be no charge to CGT on any of the assets.
- Apart from the interest in the joint tenancy the assets will all pass to Mrs G’s personal representatives, who will acquire the assets at market value at the date of death, for CGT purposes.
- The interest in the joint tenancy will pass to Mr G. For CGT purposes, he will acquire this interest at market value at the date of death. His interest in the matrimonial home will thereafter consist of one-half acquired at cost and one-half acquired at market value at the date of Mrs G’s death.
Example 2: CGT uplift on foreign assets
Mr C came to work in England from Eutopia for a few years and retained his Eutopian domicile of origin. He owned land in Eutopia, including the matrimonial home to which he and his wife had intended to return when his employment in England came to an end. He has three young children.
Mr C died before returning to Eutopia. Under Eutopian law, on the date of his death the matrimonial home passed immediately to his wife. The other land that he owned also passed automatically, to the joint ownership of his children. They have a right to partition their interests so that they can ultimately each have sole ownership of part of the land.
Mr C could not dispose of any land in Eutopia according to the laws of that country. However, had he been domiciled in England and had the land been situated in the UK he would have been able to dispose of it by will. As a result, both the matrimonial home and the holding of land are treated as ‘assets of which he was competent to dispose’. They therefore benefit from the treatment under s62(1) of the Act. There is no disposal for CGT at the date of death. The wife and the two children acquire their interests at market value at the date of death.
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