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Treatment of Unrealised Gains at Death

23.52. As a general principle the Committee recommends that a taxpayer should be deemed to have realised his assets at death for the purpose of determining capital gains or losses and the taxable portion of any gain treated as if it were income of the taxpayer in the year of death. Not to do so would be to create severe inequities between the individual who dies shortly after realising his gains and the individual who dies before realising them. It would also create a severe lock-in effect for the elderly investor who would be reluctant to sell assets and incur a tax that he would not incur were he to hold the assets until death. It has been suggested that an alternative to a deemed realisation on death is to have a carry-over of the deceased's cost-basis to the beneficiary for the purpose of determining the latter's capital gains tax liability on ultimate disposal, but this might result in an indefinite deferment of tax. The deceased should be deemed to have disposed of his assets, and the beneficiaries be deemed to have acquired them, at their fair market value as determined for estate duty purposes.

23.53. While the Committee recommends that there should be a deemed realisation on death, it recognises that this may give rise to practical difficulties in the case of an estate consisting largely of non-liquid assets such as rural property or shares in a private company. In many other instances, too, when associated with the need to find moneys to pay estate duty (which would be reduced by virtue of the fact that the liability for capital gains tax diminishes the net value of the estate), the imposition of capital gains tax on the deemed realisation may impose a liquidity strain on an estate. Some provisions are necessary to mitigate this hardship and the capital gains exemption recommended in paragraph 23.55 is one such step. As a further measure it is recommended that, in the case of an estate holding a high proportion of its assets in non-liquid items, the capital gains tax liability arising at death should be assessed in the normal way but the payment should be deferred for a specified period or until the realisation of the items, subject to interest at a reasonable rate. As an alternative, provision could be made for payment of the capital gains tax over an extended period, again with interest: a maximum of seven years might be fair.

23.54. The Budget proposals make no reference to any concessional treatment of capital gains deemed to be realised at death. In the Committee's view the liquidity strain that would be imposed on many estates by the combined effect of capital gains tax and estate duty would be so significant as to require relief. This will particularly be so in the case of those estates consisting largely of small businesses or rural property.

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