Deed of Appropriation re shareholding

Trusts Discussion
1

The residual estate of a testator includes a shareholding of 300 shares in a private limited company. There is no separate provision in the will regarding the shares - they are not mentioned at all.

All taxes have been paid and executors now wish to distribute the estate and appropriate the shares equally to the 3 residuary beneficiaries ahead of their sale, so as to enable the beneficiaries to utilise their individual CGT allowances to negate the CGT which would be payable on capital gain. All beneficiaries will benefit equally and none will be prejudiced in any way. All are in agreement.

In drawing up the Deed of Appropriation, must the appropriation be of 300 shares to them jointly, or can it be of 100 shares to each of them?

Lynn Armitt

2

Either way works, 300 equally or 100 each

Simon Northcott

3

Under the will, is their interest joint or joint and several?

I would follow the terms of the will – if joint and several (i.e. residue is given t them “equally”) I would appropriate 100 shares to each beneficiary.

It is only if the gift is clearly joint that I would appropriate the 300 to them jointly.

Paul Saunders

4

The will reads:

“My Trustees shall hold the whole of my estate on trust either to retain or sell it with power to postpone the sale and my Trustees shall pay my funeral and testamentary expenses and debts and inheritance tax payable as a result of my death and hold the residue of my estate (hereinafter called ‘my Residuary Estate’) IN TRUST for such of them A… aforesaid B…aforesaid and the said C… as shall be living at the date of my death and if more than one equally between them absolutely.”

A…, B… and C… were all living (and still are) at date of death of the testator.

So this confirms that 100 shares can and should be appropriated to each?

Lynn Armitt

5

As I said either wording will work

Simon Northcott

6

That would be my reading of their entitlement.

Paul Saunders

7

Thank you so much for your replies - much appreciated.

Let me explain my difficulty in more detail. I am an executor of the will in question and appointed a Solicitor (large practice) to administer the estate. Our tax advisor suggested the DofA. We have asked our Solicitor to draw up the DoA to appropriate the shares equally. We have not asked for any tax advice from our Solicitor. To cut to the chase, the Solicitor does not agree that it can be done. He reluctantly drew up a DofA to appropriate jointly but this contained ‘schoolboy errors’ and which we have been unable to execute. Last week, he even suggested that a Deed of Variation should be signed instead to transfer the shares to the individuals (the testator died nearly 4 years ago). I have asked again that he draw up the DoA to appropriate the shares equally to the individuals, and if not why not, and if not, to appropriate the shares jointly. This is their reply:-

'In relation to the Deed of Appropriation, I have already explained that we are, as Lawyers, straying into the area of tax which, in the first instance, we were not engaged to advise on and, indeed, are not qualified to do so. In this regard, I have noted that we would need to defer to your Tax Advisors as to the efficacy of any Deed. Subject to this, I have already explained why I feel that where the shares (the whole and undivided shareholding as set out in the Second Schedule) are currently held by the Trustees of the Estate in one shareholding and where the Will divides the sale proceeds of those shares between the residuary beneficiaries, I could not see, from a logical point of view, how the individual residuary beneficiaries could utilise their capital gains tax allowances.

Similarly, I cannot see how the Trustees of a Deed of Appropriation, could hold the shares of the Estate jointly, as, once again, a residuary beneficiary’s interest is in the sale proceeds and not the shares themselves.

However, if your Tax Advisor feels that this will work, then the current Deed of Appropriation which currently states that the only residue of the Estate that is left are, in fact, the stocks and shares and that, from the date of the Deed, the Personal Representatives hold the shares as a block as Bare Trustees for the beneficiaries and not as Personal Representatives of the Estate has already been drafted.

The only thought that occurs to me is that, if the Estate residue comprises of more than just the shareholding, then the Deed of Appropriation may need to be slightly amended to cover this and also express that the intention is to sell the shares.

As currently worded, the shares as a block would be sold by the Trustees of the Deed of Appropriation for the purpose of sale and thereafter division between the residuary beneficiaries pursuant to the Will.’

As mentioned, we have specifically not asked them for tax advice nor let them speak to our tax adviser - that is a matter for us/beneficiaries. The only other asset in the estate apart from the shares is cash, which the Solicitors are soaking up quite readily. If he considers that the draft document needs to be amended to reflect that the estate also holds an unappropriated cash sum, then really he is unhappy with his own drafting. I realise that this forum is probably not the route to address the problem, but how do I convince the Solicitor to ‘think again’?

Lynn Armitt

8

I hope the solicitor involved is not a TEP (a member of the Society of Trust and Estate Practitioners).

Is a deed of appropriation necessary?

Provided that the company directors are willing to register the beneficiaries as shareholders in their own right, the executors could do a simple resolution confirming appropriation of the shares to the beneficiaries, obtain their written consent to the appropriation (unless such requirement is excluded by the will), and then execute stock transfer forms in favour of the beneficiaries – 100 shares each.

If the shares need to remain in the name of the deceased/the executors, I suggest it would be less stressful (and perhaps less costly) to go to another law firm to draft the required document.

Paul Saunders

2 Likes
9

Hi Lynn,

I’m not sure I understand, but:

How is there any CGT? It’s uplifted on death?

The transfer of shares on death is dealt with by the Companies Articles of Association, it has nothing to do with the will precedents. On death Article 27 & 28 of the model articles stipulates the shares will be transferred to the executor of the will (Part 27) - if then any persons wishes to take ownership of the shares they must:

(2) If the transmittee wishes to have a share transferred to another person, the transmittee must execute an instrument of transfer in respect of it.

The executor transfers the shares to the beneficiaries. The remaining directors are within their rights (subject to the articles) to block any transfer without reason.

It’s a very simple process: You can download the company articles at companies house to check if any other provisions have been made for the death of a shareholder.

Richard Bishop
PFEP

10

Thank you for your response. Regrettably for us, the Solicitor/Practice are not members. However, what is worrying is that they are a large multi-disciplined practice with a dedicated probate department. I will take your advice and go elsewhere to get it done.

Lynn Armitt

1 Like
11

You can have a deed of appropriation for the shareholding to enable the beneficiaries to utilise their own capital gains tax allowances as opposed to the pr’s single allowance. Dividend income will follow the gift, once the deed of appropriation properly executed.

If there is any other income (e.g. dividends received prior to the date of appropriation or bank/building society interest) in the estate that will remain in the estate and be taxable for income tax purposes if needs be during the administration period reportable by the prs.

If there are other assets e.g. a house in the estate that may also face a liability to capital gains tax would it be prudent to have those included in the deed of appropriation.

I think a deed of appropriation is only effective for capital gains tax and not income tax. (Other than as mentioned the dividend income will belong to the beneficiary from the date of the deed of appropriation and need to be included in their own income tax return). I stand to be corrected on that point. I suppose the accountant could prepare a Form R185 for the dividend income only to the date of appropriation and for the other income to the date of the end of the administration period.

Claire Flood

12

Hi Lyn

I won’t address the technical points as I think you need to take a step back before you can move forward.

I find it worrying that you won’t let the solicitor talk to the tax advisor. The professionals absolutely need to speak to each other rather than having the client act as a barrier in between telling each what they think they need to know.

As a professional who has worked in both Law and Accounting firms I would find any client’s refusal to allow their advisers to speak to each other very worrying. My initial thought would be what are they trying to hide. Clients sometimes think they are saving money doing this (at least that is the charitable view) when actually such a position usually ends up costing them more and prevents progress. Professionals can’t progress unless they have the full picture and are professionally happy with what their clients are asking them to do. We are not here to unquestioningly do as we are told (and frankly that would do clients no favours either).

Credit to the solicitors for raising concerns, regardless of whether they are technically correct (on which I make no comment).

I suggest if you want to move forward you let the advisers talk to each other.

Sara Spencer

13

Regarding Claire’s point, a residuary beneficiary with an absolute interest in the deceased’s estate is subject to income tax in the tax year in which any income of the estate is paid out during the administration period to which that beneficiary is entitled. There is no relating any such income back to the tax year of original receipt by the PRs (as would apply, for example, to a specific legacy) for income tax purposes.

Any income accruing to the PRs from the date of death during the administration period will fall subject to income tax on the part of the residuary beneficiary to whom such amounts are paid out. Thus, estate income accruing to the PRs prior to any deed of appropriation will ultimately fall to be taxed on the part of the recipient residuary beneficiary.

Malcolm Finney