Julie asks:

My mother died in April and my brother and I are her beneficiaries.  She was in a care home, and her estate consists only of her home, which is currently rented out. There is no liability to inheritance tax.

The tenant has a contract until the end of March 2011, and it would be expensive for us to break that contract, so we have decided against this and will not be putting the property on the market until next spring.

I have been informed that there will be a liability for capital gains tax when the property is sold.  Is this true?  Would we be better off leaving the property in my mother's name, or would it be better to transfer the property into our names immediately, as I assume we could each use our own capital gains allowance against any liability when the property is sold?

If we leave the property in my mother's name, I assume that any rent would remain within the estate until such time as the estate is wound up when the property is sold. In that case would the rent be liable to the basic rate tax, as my mother was a lower rate taxpayer?

If we transfer the property to our names, the rental income would come to us.  Would it be subject to higher rate tax as my brother is a higher rate taxpayer and the rent would be enough to tip me into the higher rate bracket?

This question revolves around the taxation of ‘estates in administration’, ie what happens to the estate of someone who has died. During the administration period – when the estate is being sorted out by the personal representatives of the deceased – any income that accrues to the estate is indeed taxed at only the basic (20%) rate.  

When the administration is completed and the estate assets are distributed, the accrued income is given to the beneficiaries (ie you and your brother) and becomes taxable on the two of you at the time you receive it. You get a credit for the 20% tax the estate has paid but you then have to pay higher rate tax if that extra income takes you into higher rate (for you) or you are already higher rate (your brother).

So, by leaving the estate income in the estate all you are doing is deferring the ‘evil day’ when it is taxed on you and your brother – although such timing might be to your advantage – especially if split over more than one year.  I should also mention that any income that came to your mother before her death remains taxable on her and that she is entitled to a full personal allowance for the tax year in which she died. 

For capital gains tax, the estate takes the house at market value – probate value – at the date of your mother’s death. There is no CGT on death; if the house is simply passed to you and your brother, you take it at the probate value and there is no CGT at that point. When you sell it, any gain in value since the date of death is taxable on the two of you, split between you; you may well each have your annual CGT exemption available to offset.

If the estate decides to sell the house, then the estate has an annual exemption (but only one) to set against whatever gain it makes – the difference between probate value and sale proceeds in the normal way – and taxed at 28%.

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