X died 18 months ago leaving her estate to sibling Y. Assets have been vested in Y.
Y has recently died and we are drawing up an IOV for Y’s beneficiaries to vary the disposition of X’s estate in their favour to prevent taxation again in Y’s estate.
The principal asset in X’s estate was a house in which Y was living. This has increased in value in the period since X’s death.
My question is - should the reading back intention for CGT purposes be included in the IOV or not?
If we include the intention, the beneficiaries would take the house at the value at X’s death which would give them a lower base cost and a higher CGT bill on sale.
If we do not include the intention, does the disposal of the house (by Y’s executors?) benefit from the usual uplift to market value on death rules so that the beneficiaries would take it at the higher value and there would be no CGT liability in respect of the increase in value between the two deaths?
On the basis that the estate of X has been fully distributed, the omission of the CGT declaration in the proposed IoV will mean that the normal CGT rules on Y’s death will apply, so that the beneficiaries of Y’s estate will take for CGT purposes as at the death of Y.
If X’s estate had not been fully distributed, in executing the IoV Y’s beneficiaries would have been disposing of a chose in action equal to the value of the un-administered estate and could be liable for CGT on that disposal (applying the House of Lords’ decision in Marshall v. Kerr) which would be based on a nil acquisition value (although HMRC rarely takes that point). In which case it would have been important to consider if 2 IoV’s should be executed, one for the un-administered assets and the other for those which had been distributed to Y.
I have been trying to get my head around Marshall v Kerr. The only undistributed asset from X’s estate is cash held on solicitors client account so I assume we do not need a separate IOV for that?
The undistributed cash represents the remaining chose in action which,
technically, is a separate asset chargeable to CGT, despite that the
underlying property is cash.
Depending on the amount of cash in question, there could be a sound
argument for having a separate IoV relating only to that cash balance,
to include the CGT declaration. However, this could be managed by making
a further distribution of the cash to the estate of Y, reducing the
potential exposure to CGT should HMRC decide to take the point. The
subsequent IoV could then omit the CGT declaration on the basis the
potential CGT on the reduced value of the chose in action may be
negligible.
If only 1 variation is made, containing the s.62(6) Taxation of Chargeable Gains Act 1992 declaration, the new beneficiary will be deemed to acquire the assets as legatee under s.62(4) TCGA – i.e. at the date of death value – regardless of whether such assets have been appropriated or distributed to the original beneficiary as at the date of the variation.
In the situation under consideration, if the LPRs of the, now deceased, original beneficiary wish the new beneficiary to have the benefit of the uplifted CGT base value, as will often be the case where the original beneficiary has died, the variation affecting those assets should omit the CGT declaration, so that the new beneficiary will take as legatee on the second death.
Where there are unadministered assets in the first estate, a CGT declaration may still be required.
It seems to me that the article by Mr Sokol addresses a different aspect and which does not directly impact the above.