I am assisting with a historic case with a fairly complicated history.
The deceased passed away in 2021 having written a will leaving some pecuniary legacies to a mixture of charities and family members. The residuary estate is left to a different charity.
The deceased’s property was sold for £35,000 more than the probate value and the charity asked for us to appropriate the property to them for the CGT relief. A previous fee earner appropriated 100% of the value of the property to the charity. When the property was sold, the sale proceeds were not transferred over as there were insufficient funds to pay all of the legacies and liabilities in the estate.
We have paid the charity £300,000 so far in interim distributions, though we hold insufficient funds on account to pay the remaining value of the property (approximately £20,000 down).
My question is whether it is possible to rectify the previous deed of appropriation (signed on 2022) or what should be done next to remedy this past issue?
I understand that there may be CGT implications because we appropriated too much to the charity and some of the proceeds weren’t used for charitable purposes. Is there a specific procedure which much be followed when reporting the gain as the property was sold in February 2022.
I don’t believe rectification would be appropriate here, as the document likely did reflect the intention of the parties at the time. However, the doctrine of mistake would appear to apply in that the executors made a distribution in breach of trust. This may be supported (should it be established) by an equitable lien over the retained monies.
I would hope that it could be resolved by agreement with the residuary beneficiary on the basis that, should it not be agreed, the executors would have to apply to the Court for a declaration that the appropriation should be set aside - this would have CGT as well as costs consequences to the detriment of all parties.
Residue is residue. The charity’s entitlement has been over-estimated and as a volunteer it must refund/not receive anything more than its entitlement to residue as recalculated.
IHT is presumably unaffected. For CGT the analysis must be that the charity was not entitled to the whole asset so the gain was partly chargeable as a disposal by the PRs (the charity holding that part of the asset on a constructive trust for them) and the tax falls on residue (nowhere else for it to go!). The charity should be grateful (a rare phenomenon) that it has benefited from a partial CGT exemption rather than none if the PRs had sold the entire asset and charged all the tax to residue.