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Strictly, executors should not distribute assets before settling liabilities of the deceased estate but there aren't any penalties of which I'm aware.
An estate is entitled to the annual CGT exemption for the tax year of death and for the next two tax years if the administration period lasts that long. If the flat is sold from within the estate, the gain will be calculated using the market value at death of your father in law as the cost for CGT puposes. Estate gains are taxed at 28% whereas gains made by an individual are taxed at 18% or 28% or a combination of the two rates depending on the level of their income.
If the flat is transferred to your mother in law, her cost for CGT purposes will be its market value at the date of death of your father in law. She will also qualify for main residence exemption from the date she moved into it which would cover two-third's of the gain.
Take a look here for more information on deceased estates and tax.
I hope this helps but let me know if you have any further questions.
You could get a retrospective valuation or google "property sale records" for the postcode and look for sales of similar property 3 years ago.
Individuals have to report gains if they exceed the annual exemption or the total disposal proceeds exceed four times the annual exemption. The notes for the SA900 make no mention of the rules applying to individuals so I would report the disposal.
As no tax was due, there should not be a penalty.