I am dealing with an estate with a large portfolio of investments which have risen in value considerably since the deceased died back in April 2020. The estate is passing 4/9 to charities and 5/9 to non-exempt beneficiaries. Before encashing the shares I worked out the overall expected capital gain from the date of death and appropriated some of the investments showing the largest gains to the charity beneficiaries, bearing in mind their 4/9 share of the estate entitlement. However, now having sold the shares there has been a further increase in value of the non-appropriated shares above the annual exemption and there will still be Capital Gains Tax to pay by the estate. The question is can the estate apportion this CGT across all the residual beneficiaries including the charities or is it only the non-charity beneficiaries who have to bear this burden?
If the CGT liability arises from sales made by the executor as executor, then that is an estate liability deductible before any beneficiary’s entitlement is established (whether that beneficiary is an individual or a charity).
However, the charities may seek an explanation as to why the executors made disposals in that capacity, thus incurring the CGT charge.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Thanks Paul, much appreciated!
Assume estate consists of 99 shares…
44 due to exempt residuary beneficiary (EB) and 55 due to non-exempt residuary beneficiary (NEB).
Assume 24 shares appropriated to EB who then sold with no CGT charge arising.
The PRs sell all the remaining 75 shares producing a CGT charge (£C).
20/75ths of £C is borne by the 20 shares of the EB and 55/75ths of £C is borne by the 55 shares of the NEB.
In short, the PRs CGT charge is apportioned pro-rata between the EB and NEB.
Malcolm Finney
Looking at Malcolm’s example, if 24 shares are appropriated to the exempt beneficiaries, the other 75 remain within the estate as they have not been appropriated to any of the beneficiaries.
If those 75 shares are then sold, without first being appropriated to any beneficiary, the sale is made out of the general estate and any CGT liability is payable out of the estate before division.
Until anything is appropriated to a beneficiary, all they have is a chose in action for the due administration of the estate – a right to their specified share of the estate generally and not to any particular asset, or a part thereof.
In Malcolm’s example, 24 shares have been appropriated to the charity(s) (revalued as at the date of appropriation for distribution purposes) so that on the eventual distribution the shares will need to be brought back into account (at the value used for the appropriation) and the total amount available for distribution divided 44/55 between the exempt and non-exempt beneficiaries, with the exempt beneficiaries receiving their 44/99ths share less the value of the 24 shares as at the date of appropriation. (N.B. I’m ignoring any adjustment to reflect the unequal distribution at the time of the appropriation, as that will detract from the main point.)
As the PR’s CGT charge is a general administration expense I agree with the suggestion that it is effectively pro-ratad between the beneficiaries, but in the 44/55 ratio in which they are entitled to share the estate rather than Malcolm’s 20/55 split.
Even had the executors “allocated” the remaining 75 shares amongst the beneficiaries before sale that does not change the fact they sell them in their capacity as executors. It is only if the shares were appropriated that they would cease to remain within the estate.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
I think the only difference between Paul and myself is the split of the CGT charge of the PRs on the sale of the 75 shares (using my example) which are not appropriated.
If the PRs appropriated 24 shares then any CGT is that of the exempt beneficiary.
The exempt beneficiary is entitled in total to 4/9 of 99 ie 44.
Thus the PRs sell the remaining 20 shares of the exempt beneficiary.
The PRs also sell the 55 shares of the non-exempt beneficiary.
75 shares in total.
Total CGT charge on the 75 shares is then split 20/75 and 55/75ths
If say none of the shares have been appropriated then the PRs sell 99 shares with the CGT charge split
44/99ths and 55/99ths as Paul suggests.
Malcolm Finney
I refer to Malcolm’s most recent posting on this matter.
Whilst he accepts that the hypothetical 75 shares have not been appropriated, he seems to overlook that the beneficiaries have no right to any particular asset within the unadministered estate so that the gain on the 75 remaining shares cannot be attributed to the beneficiaries in the ratio he suggests.
If we take a different scenario – the executor has appropriated to the charity beneficiaries those shares which have increased most in value (which I recall was the starting point).
Let’s say there are 99 different shareholdings of varying value and 24 are appropriated to the charities. The 75 unappropriated holdings remain in the estate and, upon a sale of any of them without appropriation the gain will accrue to the estate generally with any CGT paid out of the estate before division. To argue that the CGT payable on any gains is allocated directly against each beneficiary’s entitlement would be unworkable.
Whether it is only some shares that are appropriated or complete holdings should not affect the principle to be applied to any CGT liability arising on a sale of the remaining shares/holdings by the executor – that it is an administration expense and payable out of the estate before division.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals