Improvements for CGT

I am dealing with an estate in the administration period. There is a property going to a beneficiary. The beneficiary has already personally spent money out of his own pocket improving the property (so not with estate funds). The estate is now intending to sell the property. The property has increased since probate due to the cost of improvements spent by the beneficiary. I am concerned that the costs spent by the beneficiary will not be deductible for cgt. I was thinking of appropriating the property to the beneficiary but wasn’t sure if this would work as he has already spent the money. Any thoughts would be welcome.

The beneficiary may stand a better chance of persuading HMRC to accept the cost of improvements, rather than the estate which has not born the costs. Also, the estate will be liable for CGT at 28%, whereas the beneficiary might be lioable at the lower rate.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

TCGA 1992 s.38 provides:
“(1) Except as otherwise expressly provided, the sums allowable as a deduction from the consideration in the computation of the gain accruing to a person on the disposal of an asset shall be restricted to— … (1)(b) the amount of any expenditure wholly and exclusively incurred on the asset by him or on his behalf for the purpose of enhancing the value of the asset…”.

Prima facie (unless other evidence exists) the expenditure incurred by the beneficiary whilst the asset is in the deceased’s estate in administration would not satisfy (1)(b) above. Had the asset been appropriated prior to the incurring of the expenditure, such expenditure (1)(b) would have been satisfied.

Malcolm Finney

But legatees are deemed to acquire as at the DoD (s 62(4)(b)). So, arguably, the improvements did enhance the value of the asset during the legatee’s ownership, if there is an appropriation.

But I wonder what Paul means by improvements. Sprucing up the place to make it more saleable won’t count, despite being an improvement and despite enhancing the value (s 39).

If the PRs sell the property in administering the estate in computing any CGT liability of the PRs no allowance will be available wrt any costs incurred by the legatee (assuming legatee did not incur the costs on their behalf).

If the PRs appropriate the asset to the legatee (for sale by the legatee) after the legatee has incurred expenditure on the asset, although s62(4)(b) does deem the legatee to have acquired the asset as at the date of death, at the date of incurrence of the expenditure the legatee possessed neither legal nor beneficial title and thus I do not think it could be argued that s38 is satisfied.

I think it’s always difficult to decide how far a"deeming" provision actually deems.

Malcolm Finney