Appropriation and CGT

Trusts Discussion
1

I am dealing with an estate in which there is a property and the gain on the sale will be £70,000. There are 6 residuary beneficiaries, but 3 of these receive 2/9ths and the other 3 receive 1/9th. I believe that the estate could retain a portion of the property to use its own CGT allowance to further assist the overall CGT position but, if the proportion retained by the estate is within its CGT allowance, the gain to the beneficiaries receiving 2/9ths will still be higher than their individual annual CGT allowances, thus incurring tax. Also, one of the 2/9th shares is to be held on trust for a beneficiary for life (not a spouse) and then to other beneficiaries so, might this only have the Trustees half allowance of £6,150?

STEP Provisions (second edition) are in the Will so my understanding is that an appropriation does not require the consent of the beneficiaries.

If the PRs proceed in this way, is it simply left to the beneficiaries incurring CGT to report and pay their own tax (of course, we will advise them of this requirement)? Does the estate have any responsibility to the beneficiaries in respect of this tax incurred? It just concerns me that some beneficiaries will have a CGT liability and others will not, whereas, if the tax had been dealt with in the estate, they would all effectively suffer this proportionately to their share of residue.

I suppose another possibility might be to try to juggle the shares so that the estate keeps a higher proportion and try to appropriate to beneficiaries so as not to incur any tax for them individually. Of course, the estate would be paying at the higher 28% rate.

I may be overthinking it but any comments and advice would be welcome and, in particular, confirmation as to whether any individual paying tax is simply left with that situation, or whether the PRs of the estate have any responsibility to equalize the situation as between beneficiaries.

Thank you in advance.

2

An executor’s duty is to the estate (i.e. to the beneficiaries as a whole) and not to any individual beneficiary.

Should an apportionment be made to the beneficiaries other than in proportion to their entitlements, it may be complicated to balance out what will be an unequal distribution.

To apportion the property proportionately so that each beneficiary obtained a benefit equal to their “entitlement” after tax would require knowledge of their individual tax position – are they basic or higher rate taxpayers, for example.

Taking the above into account, I suggest an appropriation other than in proportion to the beneficiaries’ entitlement will create significant complications in identifying what each should actually receive, and probably open the door to complaint.

If you also take into account that the CGT allowance drops to £6,000 (£3,000 for trustees generally) for disposals made after 5 April 2023, there would probably not be enough time to obtain the information required to even start trying to do the sums, let alone work out what the sums should look like.

I would look o appropriate in proportion to the beneficiaries’ entitlements with, as suggested, retaining sufficient in the estate to utilise the estate’s CGT allowance. You should probably also point out to the beneficiaries that they must submit a return, and pay the CGT, if any is due, within 60 days of completion as, if they get caught for penalties for late disclosure, they might look for someone to blame for not having told them of their responsibilities.

And, yes, STEP Standard Provisions (2nd Edition) @ 4.15 permits appropriation without the nee for consent.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

3

I tend to agree with Paul’s comments. Note, as Paul mentions, the reduction in the annual exempt amount wrt disposals on or after 6 April 2023. Also, PRs have a right to the annual exempt amount only in the tax year of death and for the two immediately ensuing tax years.

Usually, appropriation produces minimal CGT charges and maximises net proceeds for the beneficiaries. Sometimes the PRs may realise significant capital losses in which case not appropriating may be the better option.

Often beneficiaries have themselves capital losses brought forward and appropriating in such cases is almost always preferable. Also, of course, the 18% CGT rate is potentially applicable to individuals but not PRs.

On appropriation the beneficiaries each acquire their interest at “probate value” with the PRs holding their respective interests as bare trustees. On sale any CGT charge is that of each beneficiary with the PRs having no residuary tax liabilities.

No SDLT liabilities on appropriation.

Malcolm Finney

1 Like
4

Thank you so much for your replies which are most helpful…especially given that it was a Sunday.