When Does Probate Value Become CGT Cost?
- Adil Akhtar
- 4 hours ago
- 16 min read
The Question Nobody Explains Clearly Enough
Picture this. A client rings me shortly after settling her late mother's estate. She's sold the inherited house, made what she believes is a tidy gain, and now she's staring at a Self Assessment return wondering whether she calculates her capital gain from what her mother paid for the property thirty years ago, or from the value declared on the probate application. Her solicitor told her one thing, her brother told her another, and she found three different answers online.
This is one of the most consistently misunderstood areas of UK capital gains tax, and the consequences of getting it wrong can be genuinely expensive. HMRC does not always catch these errors quickly, but when they do, the combination of understated CGT, interest, and potential penalties can be painful. So let's set the record straight, once and for all, for the 2025/26 tax year.
What the Law Actually Says: Section 62 TCGA 1992:
The Statutory Foundation of the Death Uplift
The rule that determines your CGT base cost when you inherit an asset comes from Section 62 of the Taxation of Chargeable Gains Act 1992. It establishes that when a person dies, there is a deemed acquisition of their assets by their personal representatives (PRs), and crucially, that acquisition is treated as happening at market value at the date of death. No gain, no loss arises at the point of death itself.
Why Death Is Not a Disposal in CGT Terms
This "no disposal" treatment is deliberate and important. The legislation ensures that the inherent gain accumulated during the deceased's lifetime is not immediately chargeable to CGT at death, that would represent a form of double taxation alongside Inheritance Tax. Instead, the CGT clock is effectively reset. The probate value, the market value agreed for IHT purposes, becomes the fresh base cost for whoever ends up owning the asset.
Probate Value: What It Actually Represents - Market Value at the Date of Death
When an estate goes through probate, the executors must establish the open market value of each asset as at the date of death. For property, this typically involves a professional valuation from a RICS-qualified surveyor. For quoted shares, HMRC's guidance prescribes the "quarter-up" rule: you take the lower of the two prices shown on the stock exchange listing and add a quarter of the difference between the lower and higher prices.
This Value Becomes Your CGT Starting Point
Here's the critical point that catches people out. The figure that appears on the IHT400, or IHT205 for smaller estates, as the market value of an asset is the same figure that becomes the CGT base cost for the personal representatives, and then passes to any legatee who inherits that asset. It does not matter what the deceased originally paid. It does not matter whether the deceased held the asset for forty years and accumulated a seven-figure gain. That history is wiped clean for CGT purposes.
The Journey From Probate to Beneficiary: How the Base Cost Transfers - Personal Representatives Hold the Asset First
When someone dies, their assets vest first in the personal representatives, typically the executors named in the will. During the administration period (which runs from the date of death until the estate is fully wound up), the PRs hold the assets, and they can be liable for CGT if they sell assets during administration. Critically, their base cost is the probate value, not the original acquisition cost. See HMRC's Capital Gains Manual at CG31000 onwards for the full treatment of PRs and CGT.
When Assets Pass to Beneficiaries
When a PR transfers an asset to a legatee, that is, someone entitled under the will or intestacy, this transfer is itself treated as a no-gain, no-loss disposal. So the legatee acquires the asset at the same base cost as the PRs: in other words, the probate value. This means the beneficiary picks up exactly where the probate valuation left off. If they later sell, their gain or loss is calculated from that probate value, not from any earlier acquisition by the deceased.
A Worked Example: The Inherited Property - The Scenario
Consider this real-world type of situation I encounter frequently. A father purchased a property in 1995 for £85,000. He dies in March 2025. The RICS valuation for probate purposes establishes market value at the date of death as £340,000. His daughter inherits the property and sells it in January 2026 for £365,000. What is her CGT position?
The Calculation That Matters
Her base cost is £340,000, the probate value, not £85,000. Her gain is therefore £365,000 minus £340,000 = £25,000. After her annual exempt amount of £3,000 (2025/26), the chargeable gain is £22,000. If she is a higher-rate taxpayer and this is residential property, she will pay CGT at 24%, giving a liability of £5,280. Had she mistakenly used her father's original £85,000 cost, her calculated gain would have been £280,000 and the tax thousands of pounds higher.
Using Probate Value (Correct) | Using Original Cost (Incorrect) | |
Proceeds | £365,000 | £365,000 |
Base Cost | £340,000 | £85,000 |
Gain | £25,000 | £280,000 |
Less AEA (2025/26) | £3,000 | £3,000 |
Chargeable Gain | £22,000 | £277,000 |
CGT @ 24% (residential) | £5,280 | £66,480 |
CGT Rates for 2025/26: What Executors and Beneficiaries Are Paying: Post-Budget Changes That Remain in Force
Following the October 2024 Budget, the CGT rates were aligned. For the 2025/26 tax year, the rates for residential property are 18% (basic rate) and 24% (higher and additional rate). For non-residential assets, including shares, business assets not qualifying for Business Asset Disposal Relief, and other investments, rates are 18% and 24% respectively. The old 10%/20% split for non-residential assets was abolished. Business Asset Disposal Relief remains at 10% for qualifying disposals up to the £1 million lifetime limit, though this was confirmed to remain unchanged.
Annual Exempt Amount: £3,000 in 2025/26
The personal annual exempt amount remains £3,000 for 2025/26, substantially reduced from the £12,300 available just a few years ago. PRs have a separate annual exempt amount equivalent to the personal amount for the first three tax years of the estate, under Section 3(7) TCGA 1992. After that, PRs have no annual exemption. This is an often-overlooked point that can make a material difference when an estate takes years to administer.
Where Things Get Complicated: IHT Valuations and CGT Base Cost: The IHT Valuation Is Not Always Final
Here's something that trips up both beneficiaries and their advisers. The probate value submitted to HMRC on the IHT400 may not always be the value that HMRC ultimately accepts. HMRC's Shares and Assets Valuation team or the District Valuer may challenge valuations, particularly for property and unquoted shares. If HMRC agrees a higher value for IHT purposes, that higher agreed figure becomes the base cost for CGT. If a lower value is agreed, the lower figure is the base cost.
Deed of Variation Can Affect Base Cost
A deed of variation, made within two years of the death under Section 142 IHTA 1984 , can redirect assets to different beneficiaries for IHT purposes. For CGT, the legatee who ultimately receives the asset under a variation still takes the base cost at probate value. The deed of variation does not create a fresh acquisition date or a different base cost for CGT purposes. I have seen clients incorrectly assume that a variation resets the CGT clock in some way, it does not.
Post-Death Falls in Value: When the Asset Drops Before Sale
The Scenario That Creates Losses
Not all inherited assets increase in value between probate and eventual sale. If an executor sells an asset during administration at a price below the probate value, a capital loss arises. This is a legitimate loss that can be set against other gains within the estate. For beneficiaries who receive assets and later sell at a loss, the same principle applies, the probate value is the base cost, so a fall creates a capital loss.
Using IHT Loss Relief on Property
Where residential property is sold within four years of the date of death at a loss, there is an important interaction with IHT. Under Section 191 IHTA 1984, a claim can be made to substitute the sale price for the probate value for IHT purposes, reducing the IHT that was paid. If this election is made, the sale price also becomes the CGT base cost rather than the probate value. Claiming the IHT relief effectively reduces your CGT base cost, so it needs careful analysis before making the election. I have seen clients rush to claim this without realising it removes the higher CGT base cost. Run the full numbers both ways before deciding.
Probate Valuations for Shares: The Quarter-Up Rule in Practice: Why Quoted Shares Are Different
For quoted shares at death, the base cost is not simply the mid-price on the date of death. HMRC prescribes the lower of two prices: the quarter-up price (lower price + ¼ of the difference between lower and higher), or the average of the highest and lowest bargains on the day. Executors and their advisers should use the HMRC Shares Valuation guidance to apply this correctly. Using the wrong share price at death, even by a small margin per share, multiplied across a large holding can produce a materially incorrect base cost.
Unquoted Shares: The Expert Valuation Problem
Unquoted shares, in family companies, for instance, require a negotiated valuation with HMRC's Shares and Assets Valuation team. These are frequently the subject of disputes, and the agreed value can sometimes differ significantly from what the executors originally estimated. Whatever value is ultimately agreed with HMRC for IHT forms the base cost for CGT. This means that if a beneficiary of a family company shareholding wants to sell shortly after inheritance, agreeing the IHT valuation promptly is practically important. The CGT base cost cannot be finalised until the IHT position is settled.
A Tribunal Perspective: Where Disputes Actually Arise
The Valuation Dispute Problem
First-tier Tax Tribunal cases involving inherited assets and CGT base cost tend to cluster around one core issue: the accuracy and defensibility of the probate valuation. In situations where market conditions shifted rapidly between the date of death and the date of sale, both taxpayers and HMRC have sometimes sought to challenge the original valuation. The FTT has consistently held that the statutory position under Section 62 is clear, base cost is market value at death, and the real argument is always about what that market value actually was.
The Lesson for Estate Planning
The practical takeaway from surveying tribunal decisions in this area is straightforward: invest in a rigorous, contemporaneous valuation at the date of death. A well-documented RICS valuation report, filed with the IHT return, is far harder for HMRC to challenge than a retrospective estimate. And if HMRC does raise an enquiry into the estate, you want a defensible, professional opinion. I've seen executors save tens of thousands of pounds in both IHT and CGT by getting this right at the outset.
Checklist: Establishing the Correct CGT Base Cost on Inherited Assets
Use this before filing any CGT return involving an inherited asset:
● Obtain the IHT return (IHT400 or IHT205) and identify the value declared for each asset
● Confirm whether HMRC accepted that value or agreed a different figure following correspondence
● For quoted shares, verify the quarter-up price as at the date of death
● For property, confirm the RICS valuation date matches the date of death (not date of probate grant)
● Check whether an IHT Section 191 relief claim was made, this changes the CGT base cost
● Confirm whether a deed of variation exists, it does not alter CGT base cost but may affect who is filing the return
● Establish when the asset passes from PRs to beneficiary, to determine whose annual exempt amount applies
● Check whether the estate is still within the three-year PR AEA window
● Confirm whether Business Asset Disposal Relief applies if the asset includes business or agricultural elements
● Record all enhancement expenditure incurred since death (e.g., improvement works to a property)
The Enhancement Expenditure Angle: Post-Probate Improvements: What You Can Add to the Base Cost
Base cost for CGT purposes is not frozen at the probate value permanently. Under Section 38 TCGA 1992, allowable expenditure includes the cost of enhancement, that is, money spent improving an asset that is reflected in its value at the time of sale. This is particularly relevant for inherited property where a beneficiary undertakes a refurbishment or extension before selling. Documenting this expenditure meticulously, invoices, bank records, planning consents, is essential, as HMRC may request evidence.
What Does Not Count
Routine repairs and maintenance do not qualify as enhancement expenditure for CGT purposes, even if they are substantial. Replacing a roof like-for-like is a repair; converting the loft is an enhancement. Legal costs in connection with the acquisition, including probate costs, are allowable. Estate agent fees and legal costs on sale are also allowable deductions from proceeds. These are the four categories under Section 38, and understanding the distinction saves my clients money every year.
The IHT and CGT Interaction: Double Taxation Relief: A Relief Most People Miss
Where an asset has borne Inheritance Tax and is subsequently sold at a gain by the PRs or a beneficiary, there is a partial relief available under Section 165A TCGA 1992 , generally known as IHT taper relief on CGT, though more precisely it applies where assets increase in value between death and sale, meaning IHT was paid on a lower value than the sale proceeds. The interaction is complex and rarely straightforward, but the key principle is that the two taxes should not together take more than 100% of a gain from death to sale. In practice, this is most relevant for rapidly appreciating assets sold quickly after death.
Common Mistakes I See in Practice: Using the Wrong Date for Probate Value
The base cost is market value at the date of death, not the date the grant of probate is issued. These can be months apart. I have seen returns prepared using values as at the probate grant date, particularly where solicitors have obtained fresh valuations at that point rather than at death. This is incorrect, and while the difference may be small in a stable market, in a rising market it can meaningfully reduce the base cost.
Failing to Disclose Gain During Administration
PRs are taxpayers. If they sell estate assets during administration and realise a gain above the available annual exempt amount, they must report this to HMRC and pay CGT. A surprising number of executors, and even their solicitors, are unaware of this. The gain must be reported via Self Assessment in the name of the estate. Penalty exposure here can be significant, particularly where HMRC identifies disposals through Land Registry records or share transfer notifications.
Conflating Probate Value With Insurance Valuation
Insurance reinstatement values bear no relationship whatsoever to market value for CGT base cost purposes. I have had clients produce their household insurance schedules and suggest these are relevant to the CGT calculation. They are not. Market value, what the asset would fetch in an arm's length transaction between willing parties, is the only relevant figure under Section 62.
Summary of Key Insights
● The CGT base cost for an inherited asset is its market value at the date of death, as established for IHT purposes under Section 62 TCGA 1992, not what the deceased originally paid.
● This "uplift" effectively resets the CGT position, meaning any gain accumulated during the deceased's lifetime is not taxed on the beneficiary.
● Personal representatives take a base cost equal to probate value, and this same base cost passes to legatees when assets are distributed.
● If HMRC agrees a different value during an IHT enquiry, that agreed figure, not the original estimate, becomes the CGT base cost.
● For quoted shares, the base cost is determined using the "quarter-up" method at date of death, not the mid-market price.
● If a Section 191 IHT loss relief claim is made on a property sold at a loss, the sale price replaces the probate value as the CGT base cost, which requires careful before-and-after analysis.
● Allowable enhancement expenditure incurred after death (but before sale) can increase the effective base cost, reducing the eventual CGT liability.
● Routine repairs do not qualify as enhancement expenditure; only improvements that are reflected in the asset's sale value are allowable under Section 38.
● Personal representatives have a separate annual exempt amount (£3,000 for 2025/26) for the first three tax years of administration, after that, no annual exemption is available to the estate.
● In 2025/26, CGT rates on both residential property and other assets are 18% (basic rate) and 24% (higher/additional rate), following the October 2024 Budget reforms, making accurate base cost calculation more important than ever.
FAQs
Q1: Does the probate value automatically become the CGT base cost, or does someone need to make a formal election?
A1: Well, it's worth noting that no election is needed at all, and this is one of those areas where clients often expect a form to fill in and are mildly surprised when there isn't one. The uplift to market value at the date of death under Section 62 of the Taxation of Chargeable Gains Act 1992 is automatic and statutory. It applies regardless of whether the asset passes under a will, via intestacy rules, or by survivorship on a jointly owned property. The moment of death triggers the reset. The probate value, being the market value at that date, simply is the base cost from that point forward, for the personal representatives and any beneficiary who subsequently inherits the asset. No claim, no election, no HMRC form required.
Q2: What happens to the CGT base cost if there is no formal probate, for example, when an estate is small enough to avoid it?
A2: In my experience with clients dealing with modest estates, this question comes up more often than people expect. If an estate falls below the probate threshold, meaning the personal representatives can administer assets without obtaining a grant of probate, the CGT rules do not change. The base cost is still market value at the date of death, full stop. The absence of probate paperwork does not alter the legislation. What it does mean, practically, is that the valuation may be less formally documented. If you are in this position and later sell the asset, you should still obtain a retrospective professional valuation dated to the death, because HMRC may ask for evidence of the base cost you have used on your return. A well-dated valuation is your best protection.
Q3: If someone inherits a property that was the deceased's main residence, does private residence relief carry over to reduce the CGT base cost calculation?
A3: This is a subtle but important distinction. Private residence relief does not carry over to the beneficiary, it is a personal relief attached to the individual who lived in the property as their main home. When someone inherits a property that was the deceased's main home, they inherit it at probate value, and their own CGT position on a future sale is assessed entirely afresh from that date. If the beneficiary never lives in the property themselves, no private residence relief is available to them at all. However, if the beneficiary moves in and occupies it as their main residence before selling, they can build up their own entitlement to private residence relief from the point of inheritance onwards. The deceased's years of occupation count for nothing in the beneficiary's own CGT calculation.
Q4: Can a beneficiary use a different valuation figure from the one declared on the IHT return as their CGT base cost?
A4: Honestly, no, and attempting to do so is one of the more common errors I encounter when reviewing returns prepared without specialist advice. The probate value and the CGT base cost must be consistent. If the estate submitted an IHT400 showing a property at £280,000, that figure is the base cost for CGT purposes. A beneficiary cannot unilaterally decide to use a different value simply because they feel the IHT valuation was conservative or because a different surveyor might have reached a different conclusion. The only legitimate route to changing the figure is if HMRC itself agrees a different value through correspondence during an IHT enquiry. Once that is settled, the agreed figure applies to both IHT and CGT. Using a self-selected alternative figure on a CGT return without HMRC agreement creates a real compliance risk.
Q5: How does the base cost work when two siblings jointly inherit a property and one later buys out the other's share?
A5: Consider this scenario, and it is one I have dealt with more than once. Two siblings inherit a property in equal shares at probate value, say £300,000. Each holds a 50% interest with a base cost of £150,000. Some years later, one sibling buys out the other for £90,000, reflecting their half share of a property now worth £180,000. The sibling who sells their half has a disposal at £90,000 against a base cost of £150,000, that is actually a loss of £60,000 in this hypothetical, because the property fell in value. The sibling who buys in now holds the property with a blended base cost: £150,000 for their original inherited half, and £90,000 for the purchased half, a total of £240,000 on the whole property. Getting this right is critical, because the two halves are treated as separate acquisitions for CGT purposes.
Q6: What is the CGT treatment when a legatee receives an asset from the personal representatives some years after the date of death, does the base cost remain the original probate value?
A6: Yes,and this surprises people, particularly when there has been a long administration period and property values have moved substantially. The transfer from the personal representatives to the legatee is a no-gain, no-loss disposal under the legislation, meaning the base cost does not update at the point of transfer. If the probate value was £250,000 in 2020 and the asset is transferred to the beneficiary in 2025 when it is worth £310,000, the beneficiary's CGT base cost is still £250,000, the original probate figure. The gain that accrued during the administration period is carried through to the beneficiary rather than being taxed at the point of transfer. This is a statutory deferral, and beneficiaries should be aware that their future CGT exposure includes this embedded gain from the administration period.
Q7: Does the base cost position differ for Scottish beneficiaries, given that Scottish property law uses a different system of succession?
A7: It's a fair question, and one that comes up when dealing with estates north of the border. The Scottish legal system operates with concepts such as confirmation rather than probate, and the rights of surviving spouses and children under prior rights and legal rights differ from the position in England and Wales. However, and this is the key point, the CGT legislation is UK-wide. Section 62 TCGA 1992 applies equally in Scotland, and the base cost for CGT purposes remains market value at the date of death regardless of whether the estate was confirmed in Scotland or probated in England. The process for establishing that market value may differ in procedural terms, but the tax outcome is identical. Scottish beneficiaries are in exactly the same CGT position as their counterparts elsewhere in the UK.
About the Author:
Adil Akhtar, ACMA, CGMA, FCMA, (membership ID is 990250923) serves as CEO and Chief Accountant at Pro Tax Accountant, bringing over 18 years of expertise in tackling intricate tax issues. As a respected tax blog writer, Adil has spent more than eighteen years delivering clear, practical advice to UK taxpayers. He also leads Advantax Accountants, (registered with Companies House), combining technical expertise with a passion for simplifying complex financial concepts, establishing himself as a trusted voice in tax education.
Email: adilacma@icloud.com
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