Executry CGT and acquiring assets "as legatee"

I’d welcome any thoughts on the following.

Brother and sister are the two equal residuary beneficiaries of their father’s estate. The estate at date of death was valued at £800,000 including a house at £500,000. (The house value has been agreed with HMRC albeit residue is not yet ascertained). The sister wants the house. They agree that the sister will get the house but it is now worth £530,000. So she will make a balancing payment to the executors of £115,000 so brother and sister each end up with value of £415,000. Can it be said the sister acquires the house “as legatee” within s. 64(2) TCGA 1992 so that there is no gain on the executors’ disposal and she acquires the house at its date of death value (£500,000) under s. 62(4)? The commentaries appear divided:

  1. On the one hand most commentaries appear to say the executors would be liable on the gain of (presumably?) £30,000 citing Passant v Jackson and so rather echoing HMRC’s own CG Manual at CG30770 which also cites that case. (And that would presumably apply even if brother and sister ignored the increase in value so that the sister’s balancing payment was simply £100,000 on the basis this is not an “arm’s length” transaction and so be deemed to be at market value (s. 17 TCGA 1992)).

  2. On the other hand, Whitehouse & Chamberlain say in Trust Taxation and Estate Planning: “In CGTM30770 … HMRC cite Passant v Jackson … as authority for the view that, where a residuary legatee pays a balancing sum to the executors in order to acquire a property in the deceased’s estate, he does not acquire the asset qua legatee… There is nothing in the decision to suggest that on the original acquisition by him from the executors he did not acquire qua legatee, and although he was not allowed to include the cash sum he paid the executors to reduce the overall gain on the later sale, that is a very different point.” And I think their approach finds some support in Whiteman & Sherry and in Williams, Mortimer & Sunnocks.

I’d be very grateful for any thoughts on this. There does appear to me to be at least a respectable argument that there is no executor gain and that could be explained in the “white space” on the executors’ Return?

William Grant

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

Thank you very much for taking the trouble to provide such a detailed response. I now however have a reservation about appropriating the (whole) house to the sister because under s. 64(3) TCGA 1992 I think you acquire “as legatee” if an asset is taken “in or towards satisfaction of” your interest in the estate. But “in or towards” has been taken to mean that the value of property appropriated cannot exceed the value of your interest in the estate (In Re Phelps). So, on reflection, my thinking is now as follows.

The executors and brother and sister are happy for the sister to get the whole house provided she pays in a balancing sum so that both end up with the same value. So, before residue is ascertained, the executors can agree that they’ll appropriate a share of the house to the sister corresponding to her half share of residue (once ascertained) provided she pays a balancing sum equal to the value of the remaining share of the house. (I am concerned that if one waits until residue is ascertained before this is agreed then it might be taken to be a disposal by the brother of “his” half of the house given the terms of s. 60 TCGA 1992.)

If we assume the projected figures given above remain unchanged the executors would appropriate a share of the house corresponding to £415,000/£530,000 to the sister and she would pay the balance of £115,000 for the remaining share.

I think there would then be a disposal by the executors but the overall gain of £30,000 on the house would be apportioned: £30,000 x (£115,000/£530,000) = £6,509 which might fall with the executors’ available CGT exemption.

It would mean that the sister acquires most of the house at date of death value (i.e. £500,000 not £530,000) but looking at the wider picture I’m hoping the proposal overall would be uncontroversial with HMRC whereas my original idea was rather less so.

I should have mentioned I am in Scotland so it is LBTT not SDLT for us. I think LBTT would in principle be payable on the £115,000 paid by the sister but that is within our 0% band for LBTT. And I do not think there will be any ADS (our equivalent of higher rates of SDLT) even if the sister already owned another house.

William Grant

I wonder if a deed of variation might be a better way forward, creating: a specific devise of the property to the sister, subject to a cash payment of, say, £115,000 to the brother, with residue being redirected to the brother.

No CGT or LBTT issues

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

Thank you very much for this suggestion: the value of a fresh pair of eyes! I’m thinking that although the (say) £115,000 would be “extraneous” it would not be “consideration” but simply deemed to be a condition imposed by the testator?

William Grant

Yes, the payment is not consideration external to the variation, so that the provisions of s.142(1) will apply.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

I accept that the substantive provisions of Scots Law on administration of estates may differ, perhaps markedly, from English Law. But TCGA 1992 applies UK-wide unless there is special provision for Scotland, as in s63, or it depends on an analysis of underlying property law. The Supreme Court has ultimate jurisdiction and presumably with a Scottish element will apply the general rules of statutory construction so that tax law applies equally everywhere unless an essential difference must be recognised. So s64 (2) and (3) should apply equally on each side of the border unless Scots Law subject to that proviso. As an English lawyer I can only comment on English Law.

I do not accept that “in or towards” means that a person who takes under an appropriation a property worth more than his entitlement does not take as “legatee”. It may well be an actionable wrong (“devastavit” down here) but that does not prevent ownership passing to him. So I agree with Whitehouse and Chamberlain and not HMRC (if it is indeed their contrary view). Snell, commenting on our s41 AEA 1925, opines that an appropriation may be effective even if it appropriates an unauthorised investment or is made in favour of a purchaser for money or money’s worth from a beneficiary (including, presumably, at a price in excess of his entitlement). HMRC have no standing to challenge a transfer of ownership which is not void but only voidable at someone else’s behest, for fraud, undue influence, breach of trust etc.

The words “in or towards etc” do not appear in s142 IHTA though they are imported into s62(4) TCGA from s64. And they do appear in para 6 Sch 1 LBTT(S)A 2013. They do not however appear in para 7 Sch 1 LBTT(S)A 2013 (variations of testamentary dispositions) which is identical to our para 4 Sch 3 FA 2013 (save for the statutory cross-reference to the -identical- meaning of “chargeable consideration”).All of s142 and s62 and the para 7 LBTT provision can apply whether or not administration is complete or the property distributed. Two years is the critical time limit throughout.

I did not cover a variation in my reply to a question about Passant v Jackson and there was no hint of how long had elapsed since date of death but I agree in full with Paul. You need the reading back effect of s142 and s62(6) TCGA for obvious tax reasons but otherwise not only would the PRs not be safe from challenge, without the beneficiaries’ express agreement, it would be arguable that the sister might not take “as legatee” but rather pursuant to her agreement with her brother. She was entitled to a share of residue and not to the house but any lingering doubts for CGT purposes are resolved by s62(6)(b) recasting for those purposes by statututory fiction the original provisions of the Will.

Jack Harper

My thanks to Jack and to Paul for their helpful and instructive comments.