Capital Gains Tax Query

I am advising on an estate where there is a specific gift of a property which passes 50% to a trust for a disabled beneficiary and 50% outright to another beneficiary.

The executors have been asking me about the CGT position if the house sells for more than probate value.

My understanding of the position is that if the executors sell the property, the estate is liable to pay any CGT arising, subject to the estate’s available CGT allowance for the tax year of death and following two tax years, but if the property is assented to the beneficiaries before sale, they would be subject to the CGT payable if any, and would each have their own applicable allowances to offset against the gain.

I have been asked by the executors if there is any hierarchy of beneficiary’s interests, in terms of whether or not the estate sells or the beneficiaries sell. It seems to me that the answer can’t be fully provided until it is known if CGT is going to be an issue, but would welcome other’s thoughts as to how best to deal with this situation.

It is a matter of chance whether the property is sold by the estate or by the beneficiaries. If, prior to exchange of contracts, the property is vested in the beneficiaries, the sale is by them. By that point the executors will know whether there is going to be a capital gain or not, and can make a decision.

Julian Cohen

Simons Rodkin

I am advising on an estate where there is a specific gift of a property which passes 50% to a trust for a disabled beneficiary and 50% outright to another beneficiary.

The executors have been asking me about the CGT position if the house sells for more than probate value.

My understanding of the position is that if the executors sell the property, the estate is liable to pay any CGT arising, subject to the estate’s available CGT allowance for the tax year of death and following two tax years, but if the property is assented to the beneficiaries before sale, they would be subject to the CGT payable if any, and would each have their own applicable allowances to offset against the gain.

I have been asked by the executors if there is any hierarchy of beneficiary’s interests, in terms of whether or not the estate sells or the beneficiaries sell. It seems to me that the answer can’t be fully provided until it is known if CGT is going to be an issue, but would welcome other’s thoughts as to how best to deal with this situation.

I agree with Julian,

If you have an idea of the sale price, then you can make a decision whether to assent or not. I have had this position a number of times and provided options to the Executors in order to make a decision based on the facts.

Costs implications should also be factored in, including the potential requirement to register an Estate and prepare Tax Returns, which might be additional work, whereas beneficiaries may already be registered for tax purposes…

Lucy Orrow CTA TEP
Lambert Chapman LLP

Property in the estate of the deceased may be sold by the PRs during administration or assented to one or more beneficiaries allowing the latter to then effect any sale.

Individuals are subject to CGT at the rates of 10%/20% or 18%/28% with an annual exempt amount of £12,300.

PRs are subject to CGT at the rates of 20% or 28% with an annual exempt amount of £12,300 (for tax year of death and following two tax years).

Trusts are subject to CGT at the rate of 20% or 28% with an annual exempt amount of 50% of that available to individuals, £12,300.
However, for trusts for the disabled the CGT rules are different including an annual exempt amount equal to that for individuals (ie £12,300) ie not just 50% thereof. Have the trustees filed an election for special tax treatment [FA 2005 s37].

Any decision as to who should effect any sale should also consider the tax position off the beneficiaries including availability of capital loss offset.

Malcolm Finney

1 Like

Thank you very much for all the helpful responses. I have had two conflicting opinions from accountants regarding the availability of the estate’s CGT allowance if the property is the subject of a specific gift in the will, as opposed to part of residue. One view is that the Executors are holding the property as bare Trustees for the beneficiaries and so the estate’s annual exempt amount cannot be claimed, whereas another accountant has advised me that the Executors aren’t considered as bare trustees during the period of administration, it would only be if the period of administration has ended, probate granted and the executors still retain ownership of the properties would they be considered as bare trustees. Does anyone have any particular experience in this situation regarding the availability of the annual CGT allowance where a property in the will is the subject of a specific gift?

This is specially addressed in the STEP guidance note on appropriations, available on the STEP website

Paul Saunders FCIB TEP
Independent Trust Consultant

Executors do not hold a specifically gifted property on bare trust for the legatee from the date of death because there is no trust subsisting while the administration period is on foot as regards that asset. This will come into existence when an assent of the asset is made, which must be in writing to transfer a legal estate in land (and is good practice in any other case). An assent indicates that the asset is not or is no longer required for administration of the estate.

Previous contributors have discussed whether executors can assent to part of an asset and retain part. Assuming the Will is not to the contrary this seems entirely possible where the beneficiaries have shares of residue or a pecuniary legacy and their power of appropriation is what is being exercised (with consent unless the Will dispenses with it). It seems to me a moot point whether executors could assent to part only of a specific gift or create a part interest in it and retain or sell the remainder (I think not in principle) but because they have the right to sell the entire asset for administration purposes (unless patently unnecessary, which could be actionable) they could surely do so with the specific legatee’s consent.

Jack Harper

Once the estate is ascertained for cgt purposes, assuming it is clear the asset will not be abated, then the executors thereafter will hold the asset on bare trusts, regardless as to whether or not there has been an assent, as this will be implied.

Simon Northcott

I agree with Simon but the timescale within which the moment he identifies will be reached may be difficult to predict, not entirely within the executors’ control, and not in synch with the optimum timing for a sale of the asset specifically gifted. Whereas as soon as the executors can predict that they will not need it for administration they can assent and its sale (by them or the beneficiary or both) will be subject only to the usual uncertainties.

Jack Harper

The excellent STEP guidance note on appropriations to which Paul refers states that “an appropriation of an interest in land must always be evidenced in writing (s.53(1) Law of Property Act 1925)”.

It seems to me that an appropriation is a curious thing, which I confess I do not fully understand, but this prompts a couple of questions in my mind which Paul or others may be able to answer:

From a practical point of view there is no difficulty in ensuring if a sale by the PRs is desired (as opposed to sales by beneficiaries) that such occurs. It would I suggest in most cases be impossible for residue to be ascertained and the PRs fail to realise this and thus then finding themselves acting as bare trustees with the consequence that any sales are then those of the relevant beneficiaries.

It is not difficult for CGT calculations to be carried out to determine which from the CGT perspective produces optimal results ie sales by PRs or by beneficiaries.

There is no time limit by which an estate needs to be administered and residue ascertained. Of course the PRs need to act in a timely fashion but the time frame is determined by the relevant facts and circumstances and is by no means an exact science.

Rosemary asks “One view is that the Executors are holding the property as bare Trustees for the beneficiaries and so the estate’s annual exempt amount cannot be claimed, whereas another accountant has advised me that the Executors aren’t considered as bare trustees during the period of administration, it would only be if the period of administration has ended, probate granted and the executors still retain ownership of the properties would they be considered as bare trustees”.

During administration of the estate it is the PRs who “own” the estate assets (ie both the legal and equitable interests in the assets are vested in the PRs) and they do not hold such assets on trust. No beneficiary possesses any form of interest in the assets during administration.

I am aware that as to the position concerning specific gifts there appears to be some limited authority (IRC v Hawley (1928)) that such legatees acquire an equitable interest from the date of death but the overriding view seems to be that this view is incorrect and out of line with other authorities.

Malcolm Finney

HMRC take the view that ascertainment can be implied at an early stage so far as residue is concerned, often immediately probate is granted.

If in this case both gifts are specific not residue my view is that a bare trusteeship arises as soon as it is clear there is sufficient residue to more than cover testamentary expenses. This would often be well before probate is granted.

Therefore it is likely HMRC would normally take the view there is a bare trusteeship even before residue is ascertained in normal circumstances and it is likely to be clear to the executors if in fact this is the case.

Simon Northcott

1 Like

I note Simon’s comments but my experience is that this is not always the case.

HMRC want it both ways. When it suits, argue residue was ascertained as early as they believe they can attempt to argue whereas on other occasions they wish to suggest residue has not been ascertained at the date of any disposals. See HMRC CGTM paras 30781 and 30790.

Malcolm Finney

I’m not sure my full message was posted on the forum so am trying again.

The excellent STEP guidance note on appropriations to which Paul refers states that “an appropriation of an interest in land must always be evidenced in writing (s.53(1) Law of Property Act 1925)”.

It seems to me that an appropriation is a curious thing, which I confess I do not fully understand, but this prompts a couple of questions in my mind which Paul or others may be able to answer:

  1. Does an exchange of emails constitute evidence in writing under s.53 LPA?
  2. How does the generally accepted view that there is a deemed assent of assets when residue is ascertained sit with s.53 LPA and the above statement? What is the difference between an assent of a beneficial interest and an appropriation?

In the HMRC CGT manual at CG30940 it states:

“The requirement that assents in respect of land must be in writing, see CG30900, should be regarded as applying only to the legal ownership of the land. Therefore the beneficial ownership of all assets should, except in the exceptional cases detailed in CG30710, be considered to have vested in the legatees once residue of the estate has been ascertained, see CG30780+.”

If, according to HMRC, an assent of the beneficial interest without writing is to be implied once residue has been ascertained, why can it not be implied during the administration?

Diana Smart
Gordons LLP

I believe the analysis of bare trusteeship is wholly misconceived. It is not correct to assert that what happens in succession law when residue becomes ascertained (as regards all assets or any one such) is that beneficiaries become beneficial owners and executors bare trustees. At least as regards an asset comprised in a specific legacy; it surely cannot be even remotely argued for a pecuniary or residuary beneficiary.

No beneficiary has more than a chose in action, the right to have the estate duly administered, until the executors take positive action to implement that right. Then for a specific beneficiary there is the doctrine of relation back, but this does not involve the creation or recognition or perfection or implementation of a bare trust; it does nothing of the sort. It is an expression of the equitable right referred to by Malcolm that an asset comprised in a specific legacy should be transferred in specie to the legatee unless it needs to be used, as a last resort, to meet estate liabilities. The beneficiary under a bare trust is most certainly at no risk of losing the asset (unless he has agreed to that jeopardy, as might happen contractually in a commercial context bare trust). So the specific legatee (or devisee in old money) is never holding under a bare trust and his rights do not even approximate to such a status by comparison or analogy.

The CGT position is that the specific beneficiary who takes a transfer of the asset in question (if the deceased was competent to dispose of it) will always take as legatee because it never becomes “settled property”, as the beneficiary, if he takes the asset at all, is always, once he takes, absolutely entitled to it as against the trustee. This CGT status looks a bit like a bare trust and will embrace a bare trust but it is a purely CGT concept. So where the plan is to decide who should dispose of the asset, in its entirety or by being first split, to maximise respective annual exemptions (or tax rates, losses, residence or domicile status) the bare trust is not the, or even a, relevant concept. The key analysis is to identify who is disposing for CGT: the PRs or the beneficiary who has already taken as legatee and so become absolutely entitled against them. To bring about that status the PRs must actually do something; that can only be done by an actual assent or, I accept, an implied assent where the law of succession ordains it. In a tax planning context no one would want to risk the uncertainty of the occurrence and timing of the latter. If it is clearly the PRs who are disposing it is not arguable by anybody that it is really the specific beneficiary because he has some kind of equitable right in some circumstances to the asset. He may well do but it has no meaning for CGT.

The argument that that the PRs have given implied consent might wash and be useful in extremis where a beneficiary’s disposal is favourable but the PRs have not assented formally and so you are stuck with that. HMRC espouse principle when it suits them but are heavily influenced by pragmatism. In deciding who has disposed for CGT they will consider the paperwork, of course, but they will identify who has the sale proceeds. If the executors purported to dispose on paper and received the sale proceeds they are unlikely to accept an implied consent argument even if the net sale proceeds have since been passed to the beneficiary. They will prefer to pursue the executors for the tax (interest and penalties) as a creditor of the estate (with remedies against the entire estate, the PRs personally and tracing into the volunteer beneficiary’s hands if need be) rather than alternatively assess and pursue the beneficiary on some abstruse implied consent basis. They might do that if they fail to collect from the executors but will doubtless encounter the argument from the beneficiary that there was no implied consent!

Jack Harper

In my experience HMRC are very keen to imply an assent of the beneficial interest in circumstances where either residue is ascertained or an asset the subject of a specific legacy is not going to abate this increases the tax.

I agree entirely that one does not want to rely on or risk such an implication. However if it looks as if either may apply then accept the disposal will be by the beneficiary and assent the asset to avoid doubt and unexpected tax consequences.

On the other hand on occasion it may be advantageous to argue a disposal is by the beneficiary for cgt when perhaps executors have made a disposal and triggered tax without thinking things through. That is also something I have done using HMRC’s early ascertainment approach against them.

Simon Northcott

I am not at all opposed to Simon’s real world analysis or strategic approach. I say only that to adopt it and follow it through you need to have a sound grasp of the fundamentals of succession law and its relationship with CGT. HMRC do at top level but not always at initial ground level. And if the gifted asset is one which falls within s53 (1) LPA 1925 (interests in land) an implied assent of it is a total non-starter. Writing is required.

Jack Harper

Hmrc accept the implied assent only applies to the beneficial interest. Writing will be required to transfer the legal estate.

For cgt the implied assent of the beneficial interest is all that is required to make the beneficiaries the ones who dispose of the asset, which is what in question here.

Simon Northcott

What HMRC should say in CGM is that once residue is fully ascertained they will accept that any beneficiary who ultimately becomes the beneficial owner of an asset in the estate takes as legatee and becomes absolutely entitled as against the PRs, though if they are themselves trustees the asset may actually itself then instantaneously become “settled property” for CGT.

As a matter of the law of succession assent can be implied during the admin period, but not of land, though this means the admin period thereby terminates as regards that asset.

There cannot be implied assent to land (legal or equitable interest) or to a purely equitable interest because writing is a requirement. The creation without writing of an equitable interest in land by Will is not prohibited by s53(1)(a) LPA 1925 but a Will must itself be in writing in nearly all cases. An assent of such an interest must be in writing. An assent even of a legal interest must also be, as an exception to the higher general requirement for a deed: s52(1) and (2)(a) LPA 1925. An email once reduced to writing is surely evidence but s53 requires a disposition to be actually IN writing not just evidenced by it (with the exception of a declaration of trust). As an assent is unilateral no exchange of mails is necessary. This would also be true of an appropriation not needing consent but would be desirable where an appropriation required consent. Consent does not in fact have to be in writing though this is obviously highly desirable.

An appropriation is the term used where an asset is transferred in substitution for what the transferee is actually entitled to, a fixed sum or a share of residue or a trust fund, and may be made by an executor/administrator or a trustee (which may include one who was an executor/administrator but is no longer at the relevant time). An appropriation by an executor may be called an assent but not all assents are appropriations.

CG30900 does not say that assents of land must be in writing. It says assents of legal ownership must be. That is true but misleading. Assents of equitable ownership must also be. But the key point is rather whether “beneficial ownership” for CGT of any given asset including land can pass to a beneficiary of a Will without any assent at all. Beneficial ownership is a tax term and a concept, not even an express term of the legislation . A contract for the sale of land may pass a species of equitable ownership to the buyer but “beneficial ownership” for tax does not pass until the price is paid. In CG30940 this tax term or concept means that for CGT the beneficiary has taken as legatee and is absolutely entitled as against the PRs. It does not matter that there has not been an assent but without an assent this situation cannot occur ahead of residue being ascertained. It is entirely erroneous to describe this CGT outcome in law as an “implied assent” and I query the value to the non-specialist reader of its use even by analogy.

CG30720 is headed “confusion over terminology” and then exacerbates that by calling PRs “bare trustees” as shorthand for persons within s60(1) TCGA 1992 against whom another person is absolutely entitled and who are described as a “nominee or trustee”. Manuals must be approached with care as they are intended to communicate with readers who are not private client professionals or professionals of any kind and can be imprecise when setting out for general consumption non-tax law on which tax rules depend.

Jack Harper

Writing is required to transfer ANY interest in land and an assent is a transfer (strictly a “disposition” in s53 LPA). The point is that for CGT the transfer of a “beneficial interest” in any asset of an estate,including land, may not in certain circumstances require an assent and this type of CGT event should not be called an “implied assent”. It is not even a viable “man down the pub” description because assents are largely unknown in such venues and its imprecision is capable of causing consternation among professionals as it has in this thread.

Jack Harper