In Passant v Jackson the Court of Appeal decided that the equality money was not deductible as acquisition cost in addition to the market value of the asset on death because it saw that as double counting. The Court held that the money was paid in acquiring the property and not in preserving or defending title but the acquisition cost for CGT comprised, and comprised only, the market value because the acquirer took “as legatee”.
So the downside of paying equality money is that it does not add to the acquirer’s CGT base cost. This despite the fact that there was actually a contract of sale between the executor and the legatee. Per Slade LJ:" This arrangement must of course have been reached on the implicit understanding that the transaction would also be treated as satisfying his rights as residuary beneficiary. If the house had been sold to a third party in the ordinary way, there would still have been money to come to him out of the estate. He implicitly gave up this right by virtue of the transaction". Surprisingly the judge goes on to say: “However one may look at the true nature of the transaction of 12th August 1966, or the contract between the parties entered into in 1966, it was simply one of sale.” So even though he characterised the transaction as a sale the statute still had the above effect that the asset was acquired as legatee.
Of course the acquirer could purchase the asset for for £530,000 and take her greater share of the residue but then she would not take as legatee but as “a third party in the ordinary way”. Per Slade LJ the opposite was true because the deal impliedly satisfied and discharged the acquirer’s right to residue.
If she did that she would land the estate with a CGT liability on £30,000 and herself incur £14,000 SDLT (deductible for CGT at some future date if the house were not then eligible for PPR), less if a first time buyer or more if the extra 3% applied. The loss of £30,000 of acquisition cost at today’s CGT rates is £5400-8400, ignoring annual exemption. The NPV depends on when a disposal ever takes place, assuming no PPR. The loss to the estate of CGT on a sale now by the PRs would be £8400 if is there no PPR/annual exemption. I suspect neither party wants a sale but perhaps it would be fair for her to pay her brother rather less than £115,000. How much less would depend on how they evaluate her loss of the extra £30,000 deduction on a future disposal. Siblings can drive hard bargains!
I agree that if the executors appropriate the house to the sister it is acquired by her as legatee within s62(4), so no gain for the PRs. It helps that residue has not been ascertained but Passant is authority for that not being strictly relevant.
I think the veiled threat in CG30770 is an empty one. Passant did treat the transaction as a sale but there was after all a contract of sale. To invariably regard the type of transaction here as a sale at market value within s17 “under cover” of an appropriation is not justifed by Passant because while describing it as a sale it had to be treated for CGT as an appropriation to a legatee. If the GAAR applied HMRC could in theory recharacterise the transaction “just and reasonably” but surely it does not apply here because there is just a choice of route and it is doubly reasonable to choose not to buy the house from the PRs as a “third party” (para B11.1) and to expect that Passant (at least in plain vanilla version) will be followed as long-established taxpayer practice (paras D2.3 and D4.1). if not quite a settled practice of HMRC because of the disobliging bet-hedging comment in the Manual.
Is there any SDLT on the equality money because there is “consideration in money or money’s worth given for the subject-matter of the transaction, directly or indirectly”: para 1(1) Sch 4 FA 2003? Applying the analysis in Passant there is no “acquisition” of a chargeable interest (“subject-matter”) within s43 for which the money is given directly, so s75A would be inoperative, at least provided the transaction was not concluded as a sale but as a variation of the rights to residue. The separate house acquisition would then arguably not be liable under para 1 Sch 3, and clearly outside s75A.
It is possible to construct an alternative argument that there is indirect SDLT consideration of £115,000 for the house acquisition (not excluded by para 8 Sch 4), even with s75A applying if necessary. Passant indicates that the equality money was paid in order, or to be in a position, to acquire the property (so arguably given indirectly for it if not directly) but the actual CGT acquisition cost was set by statute at market value on death. But for the statute it might well have been treated as CGT acquisition cost. But the only consideration in sight for SDLT purposes is £115,000, GAAR or no GAAR, so under the threshold.
Jack Harper