I am involved in linked estates of two sisters; call them A and B. A died first leaving everything to B and appointing B as her executor. B died before finalising A’s estate, as the IHT position was not finalised and there were various shareholdings which had not yet been encashed or transferred.
Both estates were subject to IHT, with B’s estate paying IHT on the unadministered estate of A on top of their own assets of course.
The shares in A’s estate were then sold by the replacement PR of A’s estate, making significant gains if using the values as at A’s date of death as the acquisition value. A’s estate has not yet been finalised for IHT purposes, as there are a few matters outstanding which will require a corrective account.
I am only dealing with finalising the IHT in A’s estate and not involved with CGT in A’s estate or anything to do with B’s estate, but those who are dealing with B’s estate have commented as an aside that the acquisition value for CGT on the share sales is the value as at B’s date of death, because that’s the value on which they paid IHT. I found this interesting, given that the capacity in which the shares were sold was as PR’s of A’s estate (not B’s), and the sale was undertaken before the value of the estate was ascertained for IHT purposes, so I had thought that no bare trust arises for the residuary beneficiary. I would have thought that A’s new PR’s would have to declare the gain, based on the date of death values in A’s estate. They haven’t provided any authority for their thinking. Out of curiosity, does anyone have any thoughts on which take is correct?
Where assets are still within an estate, HMRC has been known to apply the rationale from Re King’s Settlement (1964), so that the acquisition value for CGT is the original probate value notwithstanding that occasions which would have attracted a CGT-free uplift had occurred in the meantime.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Correct me if I’m wrong, but I would’ve thought that B’s PR’s only had an entitlement to a chose in action in A’s estate and therefore the valuation at B’s death cannot be used for CGT purposes and as Paul says it is the value at A’s death that is relevant as the acquisition values
Has thought been given to varying A’s estate so it goes straight to B’s heirs? That way the IHT on B’s death on A’s estate is avoided. And the beauty is, of course, that you do not have to elect for CGT to be treated as if the assets did not pass through B’s estate, if that’s not advantageous.
This is how I was looking at it, as I can’t think of any provisions which would allow them to claim B’s death value as the acquisition value for CGT purposes. I did wonder if S.274 TCGA92 would cover it, given that when you fill in the IHT415 you have to give the values of assets as at B’s date of death. However I’m not sure that it can stretch to that as the interest is in the residue as opposed to the assets themselves as you say.
We’re way out of time for a variation for unfortunately, otherwise the solicitors for B’s estate would have been on to that as soon as B died.
On the basis that it is accepted that the acquisition cost is the value at A’s death and this produces a CGT liability for A’s executors I am assuming that when calculating the value of B’s estate for inheritance tax purposes this CGT liability can be deducted under the wide definition of liabilities in s.91 of IHT Act 1984 even though it arises after A’s death. I wonder whether that came up in this case ?
Not exactly. B’s executors would just include the sum they expect to receive from A’s estate. That calculation would include the deduction of all administration expenses on A’s estate, including CGT, but CGT on A’s estate would not be a direct liability of B’s estate.
i.e. the interest in A’s estate would be a single asset, with a single monetary value, in B’s estate for IHT purposes.
Thanks Andrew but the intriguing point to me is that for the purposes of IHT in B’s estate it is the value of A’s shares at the date of B’s death that is relevant not what they eventually sell for. If the shares subsequently go up in value after B’s death and are still sold as part of A’s estate it does not impact on B’s IHT position. However the CGT payable by A’s executors on the whole gain appears to be deductible under s.91 (2) (c). Therefore the gain after B’s death does not impact on the IHT position but the tax on the gain is deductible for inheritance purposes against the inheritance received as a whole which is rather strange but if this is correct gives some small consolation for being stuck with the original acquisition value at A’s death
IHTM22011-22025 contain HMRC’s interpretation of s.91 IHTA. This is a difficult provision, principally because it gaily enacts a conjuring trick.
The property law reality is, as Andrew indicates, that the interest in the residue of the still unadministered estate of A which forms part of the estate of B at his later death is strictly a chose in action which would normally be valued by predicting the sum B’s estate would be likely to receive once residue is ascertained with a discount for delayed receipt. This would require in some cases at least a great input of guesswork—sorry, professional expertise for a fee. Parliament apparently considered that this was far too straightforward for IHT.
My observations on s.91 and IHTM’s analysis are:
1 s.91(1) seems to be only about an IIP in income but HMRC accept that it applies to an absolute interest in capital. It is convenient that there should not be one rule for a limited interest and another for an absolute interest but the drafting does not clearly support that asserted equivalence.
2 only interests in residue are covered. Other interests such as specific legacies and pecuniary legacies will normally be easy to value as the legatee will be entitled to and will receive the specific asset or monetary amount. Exceptions will be where the Will makes a legacy subject to tax or the estate is insufficient to pay them in full or a specific gift has to be sold and the legatee cannot recoup the full value from others due to an overall insufficiency.
3 we are asked by s.91 to posit that on the death of B something has occurred which, save in the simplest estate, will not actually occur until (perhaps much) later, the ascertainment of A’s residue. Between the date of A’s death and the final ascertainment of residue date a number of significant events may well take place, notably the disposal of assets at a gain or loss, the appropriation of assets no longer required for administration, and payments of debts expenses and liabilities. Appropriations will mean that residue is not in fact ascertained as a whole on one single date but piecemeal on several dates. HMRC have generously filled in the gaps in the statute by making up the rules in IHTM22022. These events may occur both before and after the death of B, though the latter kind are not relevant for s.91.
4 the essential principle of s.91 is to deem B’s estate to be entitled at B’s death not to a chose in action but to the underlying assets which are ultimately comprised in the ascertained residue of A’s estate and that B’s PRs eventually receives but valued as at the date of B’s death. In so far as parts of residue have already been ascertained there will be actual receipts but if there is still more to be ascertained after B’s death some mental gymnastics will be needed to value the balance as of that date.
5 if the PRs sell an asset in the course of administering A’s estate CGT on any gain is a liability of that estate. It is likely to reduce residue because either the asset would have been comprised in residue if not sold or it will fall on residue per Sch 1 AEA 1925 (in the absence of any contrary direction in the Will of A).
Such CGT is in my view a testamentary expense within s.91(2)(c)(i) if it occurs before B’s death but only if the disposal of it precedes B’s death; an inherent CGT liability on a later disposal of the asset by A’s PRs is not at B’s death a liability within s.91(2)(c)(iii). If at B ‘s death his estate is entitled not to the asset but only its net proceeds of sale the CGT chargeable is plainly not ever received by B’s PRs so is deductible in valuing his interest in A’s estate.
The only objection I can conceive of is that HMRC could raise is that the disposal was not required for the due administration of A’s estate so that the CGT was not a testamentary expense. In many situations the legatees of B will prefer that the asset not be sold but retained; because assets comprised in residue which are assented in specie will pass under s. 62(4) TCGA and benefit from the s.62(1) TCGA washout of any inherent gain on B’s death. The maximum rate of IHT on the value of the asset is 40% whereas the combined rate of CGT on the gain and IHT on the net proceeds is likely to be higher. In many cases the effective IHT cost on the entire asset value will be less than than the CGT on the gain and may even be nil due to the NRB or spouse/charity exemption.
Jack Harper
Thanks Jack the missing piece of the puzzle that I am struggling to find, although it is probably hiding in plain sight, is why you say that the liability must be incurred before B’s death to be deductible under s. 91 (c) (iii). There is no such restriction in the statute. We can deduct any liabilities of A’s prs properly payable out of A’s estate. This wide definition suggests we can deduct the CGT when calculating B’s estate’s inheritance tax liability whenever incurred as long as 'A’s prs sell the shares and incur the liability. This is very odd and it was wrestling with this conundrum that led me to this discussion.
On B’s death his estate is deemed to include the assets notionally representing his interest (a chose in action) in the unadministered estate of B. At that moment, if such an asset is unsold, the CGT payable if it were, is not yet a liability of A’s PRs as they have made no disposal of it. If the PRs of A have already disposed of the asset the CGT liability is plainly a liability of A’s estate. Even so whether it reduces the value of B’s interest in A’s estate will depend on the nature of B’s interest in it.
S.91, which applies only to IHT, is specifically only about a residuary interest. If A’s PRs have had to sell the asset to meet a pre-existing liability of the estate then the CGT payable is a testamentary expense and reduces the quantum of residue. The same result would follow if it was sold to pay a pecuniary legacy as that must be paid in full if the estate is sufficient so that there was no abatement: Sch 1 AEA 1925 makes residue answerable in priority unless (most unusually) the Will directs such a legacy to be subject to payment of debts in priority to residue.
A residuary legatee is not entitled to any specific asset until residue is ascertained. At that juncture he becomes entitled to whatever unsold assets are then comprised in it. The PRs are on the contrary entitled to assent them to him willy nilly (unless he validly disclaims). They are functus officio.
They cannot however force him to accept responsibility for any outstanding liabilities that remain payable in calculating net residue. He can agree to that and may well do so, because until those liabilities are discharged the PRs are entitled to retain assets to cover them—and if a liability is not due and payable for some time that may be very unattractive.
If the creditor is not paid off early, perhaps with a discount, and the liability is not novated, the PRs may be prepared to assent the assets in return for an indemnity.
If no liabilities remain outstanding then the equitable title to the remaining assets vests in the residuary legatee by operation of law and the PRs can be compelled to transfer or procure the transfer of any legal title. The fact that any such asset may give rise to CGT on a future disposal by the legatee is irrelevant and will be his own liability if and when triggered. It would be actionable if the PRs sold such an asset once residue had been ascertained as the asset is no longer theirs and the CGT is deferrable so a detriment would follow in principle. Particularly so if the gain is washed out by the legatee’s death.
The deeming effected by s.91, like all such provisions, is not drafted comprehensively as to the extent of its consequences. An actual sale of an asset to secure due administration before B’s death is plainly deductible in arriving at residue. I would argue also that if an asset is not yet sold at that point but must necessarily be sold for that purpose after B’s death, so there is just a timing issue, it is also deductible: the mental gymnastics required by s.91 enjoin us to assume that the ascertainment of residue occurred not when it actually does but immediately after the death of A. Logically at that actual future date liabilities of A’s estate will either have been paid or will be at least ascertained, and residue is also net of the latter. It should not matter that, in the situations mentioned above, the residuary legatee assumes responsibility for their subsequent payment.
What is not deductible however is a prospective CGT liability on a gain inherent in an asset that is comprised in ascertained residue and so becomes owned, and is later disposed of, by the legatee.
S.91 does not apply for CGT. At B’s death he is only competent to dispose of a chose in action. Its acquisition cost is market value—or is it? S.62(1)(b) TCGA says there is an acquisition without a disposal so why does s.17(2) not apply? Presumably that is to be regarded as overridden.
Then another issue arises: is the chose in action disposed of when residue is ascertained in return for the assets ultimately comprised in residue? If the interval is substantial the market value of the chose on the date of death, presumably to be discounted for delay or uncertainty or both, may be less than the value of what is actually received. Does a gain arise on a disposal of the chose?
Final issue: how does s.62(4) apply? The PRs transfer to B, the residuary legatee, the actual assets they were deemed to acquire on A’s death at their then market value. They do not transfer the chose in action, which has apparently merged into those assets. HMRC do not seem to be bothered by these niceties, despite no CGT equivalent of S.91 IHTA. They acknowledge the legal point in CG30760 but without any further analysis throughout the rest of CG30700P.
A similar issue does not arise under s.62(6) before administration is complete as permitted by s.62(8); it is the disposition that is varied or the benefit that is disclaimed and not any entitlement to any actual asset—which cannot vest until residue is ascertained.
Jack Harper