This may be an old question, but advice would be welcome, please! Executors wish to sell an estate property. The beneficiaries of the estate include a charity, and the individual beneficiaries have the CGT annual exemption available, so it makes sense to assent the property to the beneficiaries. Must this be done before exchange of contracts for the sale, or can the CGT advantages still be obtained if assent takes place after exchange but before completion?
JACQUELINE THOMSON
BDO LLP
Whilst I believe the safest option is to appropriate before contracts are exchanged, and for the beneficiaries to agree the sale price, other contributors are comfortable that an appropriation can validly be made after exchange, but before completion.
Whichever timing is chosen you need to ensure that if s.41 Administration of Estates Act 1925 applies (consent to appropriate) the necessary consents are obtained either before, or at the same time as, the appropriation.
Paul Saunders
Following on from the above posts, could you provide me with an authority to confirm that an appropriation of a property can take place after exchange but before completion. The residue is yet to be ascertained.
I must say that I always deal with the appropriation before contracts are exchanged.
Patrick Moroney
I agree with Patrick.
Don’t forget that the charity must have its own survey if it is going to take a share of the equitable interest in the property.
A few years ago there was a case in which the PRs appropriated a property after exchange. The PRs successfully challenged HMRC’s CGT assessment, the court holding that the liability was by completion that of the beneficiaries. I do not recall any suggestion that it was appealed by HMRC.
I have tried to track the case down, but it seems no one else recalls it. I believe it had been referred to in posts on the Forum, but that was before the Forum was reformatted several years ago and, I understand, the previous “stock” of posts was lost in the changeover.
Whilst I question the correctness of the decision, and I suspect many others might, if it can be unearthed it might be appropriate to apply in other cases. Having said that, if it were to be adopted, I suspect HMRC might be more willing to pursue the matter before the higher courts.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
The tax position under the TCGA 1992 is tolerably clear in s28(1): “where an asset is disposed of and acquired under a contract the time at which the disposal and acquisition is made is the time the contract is made (and not, if different, the time at which the asset is conveyed or transferred)”.
An appropriation after exchange but before completion cannot change the CGT position that the disposal of the asset has already been made by the original contracting party (presumably the PRs themselves) at the date of contract.
For property law, while it cannot be governed by a tax statute, all the PRs can apparently assent to after exchange is the benefit of the contract. Assenting the asset itself to a beneficiary is theoretically possible but it would disable them from completing the contract and cause breach.
A contract is not a disposal for CGT if never completed. With the agreement of the purchaser it could be terminated, the asset assented to a beneficiary, who would then contract to sell it to the purchaser. The latter may exact a quid pro quo for this co-operation! To prevent the purchaser backing out of the bargain the termination could be made conditional on entering into a new contract or the PRs could have a parallel put option, exercisable after termination, as back-up. In this way the beneficiary would dispose of the asset for CGT purposes not the PRs.
Tax avoidance of course for those with deep theological objections
Jack Harper
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The Case is Jerome v Kelly 13.5.2004, and was a House of Lords decision.
Therefore although the exchange (if the matter is completed) fixes the date of the disposal for tax purposes, it does not fix the parties, so the person making the disposal for tax purposes in this case are the beneficiaries to whom an appropriation has been made after exchange, even though they are deemed to dispose before they aquire the asset. A very odd decision.
I, too, recall the case mentioned by Paul Saunders. Like other contributors, I always appropriated prior to exchange of contracts as, for CGT purposes, that is deemed to be the date of sale and I still prefer to do that if at all possible to avoid any problems. If I remember correctly, the case succeeded because, whilst the date of sale might be the date of exchange, that will only apply of the sale actually completes. If the beneficial ownership changes in the gap between exchange and completion then the sale is by the new beneficial owners albeit that the date of sale is backdated to a time before they became beneficial owners.
Graeme Lindop
Probate Consultant
Coles Miller Solicitors LLP
Simon
Many thanks for identifying this case. I’ve been trying to identify it for a number of years, but there seems to have been a general amnesia.
So far as I can identify, s.28 TCGA 1992 was not amended in response to the Jerome decision. It is only the Finance Act 2020 (Schedule 3, para 3) that has effected any change, and my reading of that is that it does not impact the effect of Jerome.
If anyone decides to test HMRC’s attitude towards Jerome, it would be interesting to share any feedback on the forum.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
From memory the Jerome case was a case where the Special Commissioners decided the case in favour of HMRC; High Court disagreed; Court of Appeal disagreed with the HIgh Court; and finally, House of Lords disagreed with the Ct of Appeal !!!
What, in short, I believe Jerome decided was that TCGA 1992 s 28 dictated the time of a disposal but not the person who made it.
Malcolm Finney
Jerome v Kelly decided that where the contractual sellers disposed of their beneficial interests in the land, subject to the contract, by assignment to a third party trustee before completion they were to be treated as doing so at the time of the original contract. The trustee eventually made a separate disposal to the purchaser but this was not backdated because it would have predated its acquisition of the beneficial interests. Lord Walker said at [44] “But section 27 (1) [now s28(1)] could not and did not produce the absurd result that the interests which Codan [the trustee] had acquired on 15 December 1989 were instead disposed of by the Jeromes to Crest on 16 April 1987”.
So an appropriation by PRs between contract and exchange will vest the beneficial interest in the land, subject to contract, in the beneficiary but completion will be a disposal by them of the asset at the date of the original contract; the beneficiary will also make a disposal of the beneficial interest so acquired but at completion and not backdated. Not even Lord Walker found the application of the statute to the facts entirely straightforward.
The crucial difference from Jerome lies in the operation of s62(4) with s64 (2). The appropriation arguably makes the date of death value the beneficiary’s base cost, so transferring any ultimate gain to them. In Jerome the assignment triggered a gain for the assignors (measured by market value at the date of assignment less original cost). The much greater gain (ultimate sale proceeds less that market value) was that of the trustee and so escaped charge due to its non-residence. HMRC’s argument about the timing of disposal was designed to attribute the larger gain to the resident original contracting parties, the assignors. Lord Walker said that s28 may determine the timing but it does not determine who is making the disposal or what is being disposed of.
I therefore acknowledge that an appropriation between contract and completion of the asset subject to the contract may shift a gain to the beneficiary to utilise their own exemptions, losses, and tax status. Whether that causes an issue under the contract will depend on its terms e.g. that it does not contain a prohibition on assignment. But the PRs must remember that they are the contracting vendor and an unconditional appropriation would not apparently transfer contractual obligations to the beneficiary, though the latter could not apparently object to these being performed. Not being a specialist conveyancer I have to bow to one who is, to advise on the PRs’ potential exposure/methods of managing it.
With my tax hat on I would be dubious about the PRs assigning the benefit of the contract itself to the beneficiary because it is not an asset of which the deceased was competent to dispose at death and cannot be acquired “as legatee”.
Jack Harper
Just picking up Paul’s comment with respect to FA 2020 Sch 3 para 3 which refers to
TCGA 1992, s. 28, para 3 is merely designed to prevent forestalling arrangements getting around the reduction in the ER (renamed Business Asset Disposal Relief) lifetime limits and has no general application.
Malcolm Finney