An estate contains several rental properties, and the whole estate is left equally between a number of beneficiaries. There will be CGT when they are sold, and so there may be tax savings by appropriating the properties to beneficiaries prior to sale, allowing them to use their allowances and in some cases lower rates.
But in order to be fair as between the beneficiaries, should the appropriation be carried out just using the current values of the properties, or should an allowance be made for the CGT liability with which the property is pregnant? This will make a difference if the properties have increased in value by different proportions, or if some properties’ values can be increased by the beneficiary doing a small amount of work on them. And if so, should the executors take into account the individual beneficiaries’ CGT positions? Some may be higher rate payers, and have no allowance left, so that they have all the hassle and none of the benefit of the appropriation, while others will benefit substantially from sale post-appropriation.
The degree of complexity and speculation involved in these considerations leads me to think that CGT has to be ignored for the purposes of appropriation values, but that the PRs ought to at least try to be fair as regards the gains.
What do other forum members think? Have they encountered this issue in the past?
I would be wary of seeking to adjust any distribution of the estate to take account of the tax implications for the beneficiaries.
If, say, the beneficiaries were not all subject to UK tax, the executors would also need to understand the tax regimes of the country in which individual beneficiaries were tax resident.
If one looked to take into account the tax implications for beneficiaries wholly subject to the UK tax regime, why should, a different “rule” apply where they are not so resident?
Looking at it from a more basic viewpoint – a personal representative’s duty is to distribute the estate according to the terms of the will or intestacy, as appropriate. Unless the beneficiaries agree otherwise, or there is a specific provision to the contrary, for the purpose of obtaining a “fair” distribution the PRs are required to revalue those assets being distributed as at the date of distribution (applying Re Charteris, 1917). Accordingly, to seek to adjust the distribution to take account of the tax consequences of any distribution for any individual beneficiary would appear outside of the PR’s duty.
My personal view is that the PR should look to distribute the assets without regard to the individual beneficiary’s tax position. To do otherwise will be to tie the PR up in knots and incur additional costs that might exceed any benefit that might otherwise be perceived to be achievable.
Having said the above, if the estate is left wholly on discretionary trusts, the executors may need to be aware of the tax implications of any particular distribution in much the same way as would the trustees of a discretionary trust generally.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
My experience, though extensive, has been restricted to Offshore DTs where a distribution is proposed to minimise CGT under s87 TCGA and the eligible beneficiaries have very different personal tax exposures. The trustees first consult them all or the principal ones and then document that they have considered the feedback and all other relevant circumstances and go on to make an unequal distribution. This became more circumscribed by the removal of exemption for a non-domiciled transferee, then by the inability to wash out stockpiled gains by a first distribution to a non-resident, and the onward gift rules. The last named do not seem to prevent a bona fide arrangement between transferees for the favoured to compensate the unfavoured by fair equality payments which are not “gifts” if imposed as a condition of the distribution to redress the impact of differential tax burdens.
On the contrary I do not believe PRs can deviate from the clear terms of a will which allow them no discretion. However I would not expect that it could be challenged if they distributed in specie to those consenting and sale proceeds to the others to reflect differing CGT burdens. This happens often and is beneficial where the non-dom/non-res takes as legatee so that there is no need to claim hold-over relief (denied to a transfer in specie out of a trust). If the transferees come to an arrangement varying the terms of the will with bona fide fair equality payments the PRs can surely safely distribute accordingly. There can be no reading back due to the giving of consideration but this will not affect the identity of who makes a disposal for CGT and should not be a TOV under s10 IHTA. This analysis seems also to assist with the management of s87 in the first paragraph.
So while I think PRs cannot unilaterally vary a Will’s specific distribution provisions that confer no discretion, I do believe that all the beneficiaries who are to take (here equally but it could be unequally) can reach an agreement on a different scheme of distribution and as to all relevant valuations and ancillary matters e.g. cost of work needed on an asset to reduce its valuation. I do not see why such an agreement would itself have tax consequences provided any quid pro quos (? quae pro quibus) were not imbued with donative intent. This is the principle applies to a bona fide compromise settlement of actual or threatened litigation.
A beneficiary may not be liable to UK tax (eg it is a charity), but non-UK residents are not nowadays in that position as regards CGT on gains made from disposing of UK land. As you say, they may also be liable to tax in the country of residence. Treaty or unilateral relief might provide protection from double taxation.
UK residents are required to make a CGT return within 60 days of completion of the sale of UK residential property when they have a tax liability on the gain. The tax is due by the same deadline.
Non-residents must make a return regardless of the type of UK property sold, even if there is no tax liability.
Any professional fees that might be incurred in preparing these CGT returns, perhaps, should be a factor in the planning.
One point to bear, in mind, of course, is that, If it is necessary to re-value the asset for appropriation purposes, the beneficiary will for CGT purposes be deemed to have acquired it or the share of it at its probate value.
I should perhaps have clarified that the invariable approach of the Capital Gains Article in our Treaties is to set out what gains the other state is entitled to tax as well as the UK, subject to treaty or unilateral relief. The UK is entitled to tax its own residents in accordance with its domestic territorial scope, in s1A TCGA, now including some non-residents’ gains on “UK land” as Duncan mentions but always inclusive of assets of a UK branch or agency (permanent establishment or fixed base in Treaty-speak).
The reciprocal right of the other state is that the UK can only tax that state’s residents if the Article permits. Resident here means resident for the purposes of the Treaty with individuals chargeable in both states’ domestic law being assigned to only one under the tie-breaker Article. It depends on each Treaty but the aim of the UK, and usually its achievement, is the right to tax the other state’s Treaty residents on any gains on which the UK taxes those who are non-resident under its domestic legislation. The right is usually reciprocal, although sometimes there is a mismatch as to what gains are taxable on non-residents in each State under its own domestic law.
I am not convinced that Jack’s analysis of TCGA 1992 s 87 has any direct relevance to Alexander Learmonth’s post re wills/beneficiaries. The will under discussion provides who is to benefit and how (equally); this is not the case under s87 where the trustees have discretion as to which beneficiaries under the trust should benefit and to what extent.
I don’t think that the tax position of the beneficiaries can simply be ignored when potential CGT liabilities and appropriation are being considered. Ideally, discussions between the PRs and the various beneficiaries would be sensible in order to seek to mitigate any potential CGT liabilities.
At its simplest, if one of the beneficiaries is a charity or non-UK resident then other things being equal any sales, post death, should be made by such beneficiaries not the PRs. If, for example, any sales are likely to give rise to capital losses consideration should be given to any beneficiary who may be capable of utilising such losses.
However, if what is being considered is appropriating at values which take into account CGT liabilities of beneficiaries so that the “net take” of each beneficiary post CGT liability is the same, I’m not sure that this is within the PRs jurisdiction and have my doubts that the beneficiaries can mutually agree to, as Jack puts it, “a different scheme of distribution” changing what would otherwise be the CGT consequences if distribution was per the will’s terms.
I hoped I had made it clear that there is a difference in my view between the position of PRs, who have no discretion but must follow the distributive provisions of the Will and trustees who (though not always) may have discretion within the terms of their trust to distribute flexibly.
One key discretion of PRs is to dispose of an asset to meet liabilities, discharge of which obligations takes precedence over legacies. Their discretion is not unbounded. One imagines they would generally be reluctant to to dispose of an asset specifically gifted but what if the assets destined for residue are much more difficult to sell? Are they stuck with retaining the highly liquid asset subject to a specific gift and incurring interest on consequent borrowing. In a solvent estate the rules are set out in in s34 (3) and Sch 1 Part II AEA 1925 but supplemented by the equitable doctrine of marshalling, non-statutory but acknowledged by s2(3) (a) for “real estate”. This doctrine in effect gives a disappointed beneficiary e.g in the above situation a limited right of subrogation, preserving as far as possible his place in the order of priority in Sch 1. The doctrine survives the AEA, says the Book of Snell as quoted with approval in Matthews’ WT [1961].
There is also s33(1) AEA as amended by the 1996 Act: "On the death of a person intestate as to any real or personal estate, that estate shall be held in trust by his personal representatives with the power to sell it.” So a primary duty with an ancillary power whatever the nature of the asset. A power to sell pre-supposes a power not to sell.
So PRs are more circumscribed than trustees but not completely. Can they exercise their discretion not to sell when the beneficiaries are in what would be a Saunders v Vautier and do not wish them to sell? Must they or be at risk if they refuse?
Malcolm says " if one of the beneficiaries is a charity or non-UK resident then other things being equal any sales, post death, should be made by such beneficiaries not the PRs". They have the power but must they regard the beneficiary’s wishes. They also have the power of appropriation under s41 which may not be lawful without consent as per the Provisos. Wills used to and may still override this requirement to prevent the assent, if such document were needed, to avoid Stamp Duty (see STEP 4.15)
I cannot believe that if the beneficiaries of full age and entitled together to the assets which the PRs hold on trust ask them to exercise their power of sale or appropriation in a particular way for tax-efficiency (and it does not otherwise impinge on their fiduciary duty e.g. adversely affect other beneficiaries) that they lack “jurisdiction” to accede to the proposals.
I should have added that s19 of the 1996 Act can be invoked with a trust of land (PRs are such) and that an appropriation contrary to the strict rights of quasi SvV beneficiaries are also in their power, though they may well seek an indemnity and s61TA authorisation