Will my children have to pay capital gains tax on my flat when I die?

Money

My mother died in 2004 and left me her flat. Initially I rented it out, but now my son lives in it while my husband and I live in our own house.

When I die, will the children have to pay capital gains tax on the flat when they sell it to share the value? I think we are safe with inheritance tax as both properties together are worth about £700,000.

Is there any way to avoid CGT? Would it be better, for example, for me to sell the flat now?

Mrs H. S., Berkshire.

Looking ahead: One mother wants to know whether her children will be lumped with CGT in future (stock image)

Looking ahead: One mother wants to know whether her children will be lumped with CGT in future (stock image)

Looking ahead: One mother wants to know whether her children will be lumped with CGT in future (stock image)

Tony replies: I put your question to Richard Morley, tax dispute resolution partner at accounting firm BDO.

He told me that as long as you still own the flat in your sole name and your children inherit it from you, for tax purposes, they will acquire it at its value at your death. So, if they sell it shortly afterwards, any capital gain should be within their annual exemptions (£11,700 each).

In contrast, if you give them the property now, you will pay capital gains tax calculated as if you had sold it at market value.

‘If the flat and your other assets not passing to your husband are worth less than your inheritance tax [IHT] nil-rate band — currently £325,000 — when you die, your children will inherit it free from IHT,’ says Mr Morley.

‘In addition, if your husband dies leaving everything to you, both properties could pass to your children tax-free.’

Mr Morley points out that as well as inheriting your husband’s IHT nil-rate band, you both have a main residence nil-band that can apply when passing your main home to direct descendants.

‘For couples where the second death occurs in 2020/21 or later tax years, this can exempt up to £1 million in assets passing to their children. But do make sure your wills are properly drafted so your family benefits from these tax reliefs,’ he says.  

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