Deeds of Variation and CGT

I have put below my original posting about CGT and DOVs. I am not sure how it ended up with the wrong heading-but thanks Diana for your response. Do any members have experience of hmrc accepting a substituted “seller” for CGT in these circumstances? It seems
to be stretching the tax fiction rather too far.

Simon Northcott

Simon, I am responding to your post under the same heading for continuity, but perhaps the heading should be changed as the subject matter does not appear to match.

I have always thought the same as you – that the original beneficiary would still be chargeable in relation to any sale pre-DOV. However, that does not seem to be reflected in the HMRC guidance, which states (at CG31630) as follows:

  • If the assets have vested in the legatee and the legatee has disposed of the assets before the deed is executed, then the disposal is no longer treated as an occasion of charge for the legatee. Instead it is treated as an occasion of charge for the assignee.
    It won’t, presumably, have any such effect if the sale is by the executors, however.

**Diana Smart

**Gordons LLP

Previous Replies

HMRC accept I believe that varying the devolution of an asset that has been sold can be achieved for IHT purposes, by gifting the proceeds in a deed of variation, and linking back the proceeds to the original asset in the deed.

However I do not believe this can result in a read back in relation to the sale for CGT purposes, by substituting the new beneficiary as the person making the CGT disposal. Do members agree? I thought there may have been a case confirming this, but cannot find

Simon Northcott

S.62(6) TCGA 1992 applies only for the purposes of that section, unlike
S.142 IHTA 1984, which applied for the purposes of the Act.

I have therefore always understood that the assessable party on a pre
variation sale is not changed by the variation. I am sure that in
discussion with Gerry Swires whilst he was HMIT, he agreed this.

Since then, I know people have objected to the “unfairness” of this as
the person making a gift can end up with the CGT liability. Conversely
of course, if the recipient becomes the assessable, this can play havoc
with their CGT planning if, say, shares are sold out of the estate or by
the original beneficiary and the recipient holds the same class of

I don’t believe that HMRC’s guidance, as referred to by Diana, is
supported by the legislation and looks a fudge to appease.

I wonder, though, how often the background of any disposal is set out in
sufficient detail to HMRC for the issue to be identified and properly

Perhaps something to be raised via the professional bodies in order to
enable us to be able to confidently advise clients on the consequences
of particular actions when a variation is considered.

Paul Saunders

I always hesitate to disagree with Paul, but I think that the paragraph quoted by Diana from CG31630 is a valid interpretation of the legislation.

As Paul says, section 62(6) TCGA 1992 applies only for the purposes of that section, but that surely means the whole of section 62.

It is sub-section 62(4) that lays down the tax treatment of a person acquiring an asset as legatee. If a variation within 62(6) has changed the legatee, “as if the variation had been effected by the deceased,” there is some logic in the new legatee becoming the disponor for CGT purposes.

I would have thought that HMRC’s approach was likely to be helpful in more cases than it is unhelpful.

**Anthony Nixon
**Irwin Mitchell Private Wealth

I would suggest that there is a difference in HMRC’s view as expressed, as referred to above, at para 31630 compared to their statements in para 31600.

Under the latter, it certainly seems to me that HMRC could equally argue that any disposal was not by the recipient under the DoV but by the original beneficiary.

Malcolm Finney

I agree with Anthony that s.62(6) must apply the whole of s.62, including sub-section 4, to a variation.

However, whilst the legatee may have been changed for CGT purposes, has the disponor also changed where an asset no longer exists as at the date of the variation?

Where an asset is sold by the personal representatives, unless first appropriated to the beneficiary it is a sale by the PRs and assessed as such. It is only if “residue has been established” that a sale of an asset by the PRs without first being appropriated may be assessed upon the beneficiaries.

If an asset has been sold before the date of a variation, whilst the variation may attach to the proceeds of sale, the PRs cannot have appropriated the asset to the beneficiary and, thereby, have sold that asset on their behalf as bare trustee. Notwithstanding that the legislation provides that s.62 shall apply as though the variation was made by the deceased, can it change the fact that the sale has been made, assessable by reference to those parties entitled at the time, as set out elsewhere within the TCGA 1992.

It seems to me that there are at least 2 schools of thought on this matter, as current expressed by Anthony and me, and, whilst that to which Anthony refers might be “more helpful” (in some circumstances?), their co-existence does not assist us in advising our clients. If he and I were advising the donor and beneficiary in connection with a deed of variation under which the point arose, how would we resolve it – possibly by a fudge to avoid expensive arguments?

As mentioned in my previous posting, I believe this is an issue which needs to be resolved, probably with HMRC via the professional bodies.

Paul Saunders

I do not believe there is a contradiction in the CGT manual.

In 31600 it states that you cannot make an effective gift of what you have sold, instead you make a gift of the proceeds representing what has been sold. The IHT and CGT fictional backdating then applies to the original asset, as there has been given away what
now represents the original asset.

31630 then confirms that acting in this way changes the person who makes the disposal for CGT purposes, and HMRC accept this can be done for IHT purposes.

Simon Northcott

Simon in his contribution above makes a quantum leap in his logic. Whilst it is true that under the DoV the gift is made not of the original asset but the sale proceeds therefrom (per HMRC) it does not “then” follow as he asserts that “fictional backdating applies…”.

There are subtle differences in the implications/deeming of a DoV for IHT versus CGT.

CGT arises on disposals of chargeable assets but at the date of the DoV in Simon’s case it is not an asset of which the deceased was competent to dispose (as required by TCGA 1992 ss62(10)) that is then being disposed of; it is the sale proceeds. As a consequence, it does not then automatically follow that back dating is extended to substitute one beneficiary for another with respect to the disposal.

In my view there is therefore I believe a possible conflict between the two HMRC Manual references. Neither position is clearly correct and so it would seem that this ambiguity leaves HMRC to jump whichever way suits them at the time.

Malcolm Finney

Sounds like our beloved HMRC!

As for leaps of logic, if HMRC can do it, then it may help clients to do so, particularly if HMRC seem to support it.

Simon Northcott

As Malcolm says: “Neither position is clearly correct and so it would seem that this ambiguity leaves HMRC to jump whichever way suits them at the time”.

However, where does this leave the practitioner trying to advise their client?

If the new beneficiary is treated as having disposed of the asset (pre their entitlement under the variation) the CGT treatment is inconsistent with that for income tax, where the variation does not affect the original beneficiary’s liability in relation to distributions to them before the date of the deed (regardless of whether they retain that benefit or it is passed to the new beneficiary).

Whilst I appreciate that consistency and logic are not necessary applicable to a tax regime, inconsistency, and the lack of certainty it creates, can only lead to confusion and a greater potential for rules to be mis-applied or missed altogether, to the detriment of practitioners and their clients.

Paul Saunders