Partial Deed of Appropriation

We are dealing with a conveyancing matter, where the property is the only asset in an estate (we are not dealing with the probate).

The Executors want to do a Deed of Appropriation to beneficiaries because there is a CGT issue. However, because the property is the only asset of the estate, out of the sale proceeds the legacies and expenses need to be deducted before the residuary estate can be distributed.

This means, I think, that they can only part appropriate (works out at 83%) the property to the beneficiaries and must retain the 17% in the estate. Is this possible? Are there any potential pitfalls for CGT?

Thank you

I believe that HMRC are of the view that appropriation of a share in land does not work for CGT (based on Crowe v Appleby [1976]) although I have never understood their logic in this regard. I am unaware if HMRC’s view has changed.

Could the property instead be appropriated in its entirety albeit subject to a charge to cover the expenses etc?

Malcolm Finney

With regard to Malcolm’s post of 9 October, my understanding is that HMRC has accepted partial appropriations for a number of years.

Whilst, at one point, I anticipated that such an arrangement would fall foul of Crowe v. Appleby, Tom Dumont (now QC) kindly talked me through it and persuaded me otherwise. I have since been involved in a number of such arrangements in which HMRC has not queried the principle.

Whilst the alternative arrangement suggested by Malcolm does also work, if one of the beneficiaries is a charity then the disposal will not benefit from CGT charity relief as the proceeds are not (wholly) applied for charitable purposes (s.256 TCGA 1992).

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

I agree that a partial appropriation would be appropriate in this instance.

The only issue I would think of CGT wise is, if a CGT liability arises for any of the beneficiaries or the estate, to make sure that they are aware of the need to submit a return to HMRC and pay the tax due within 30 days of completion of the sale.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

I am not sure what the CGT issue is. We are not told that the interests in the residuary estate are contingent. Only then would Crowe v Appleby be relevant. Even where it is, HMRC accept that the exercise of an available power of appropriation by the trustees will itself cause absolute entitlement: CG37530.If there is no subsisting contingency that event will have already occurred. You cannot use the power to pre-empt absolute entitlement if it has occurred already.

I am not sure however that this is what is meant here. The legatees may have absolute shares in residue apart from the legacies. If so the administration period would still be in operation and the land would not have even become settled property as it is not yet held on trust within s68 TCGA. The concept of absolute entitlement would be a red herring for the time being.

If the PRs sell the gain will be theirs and I suspect that they prefer to allow the legatees to take under s62 who can then realise the gain for themselves on a later joint disposal. Only the legacies prevent that as the PRs must prudently keep control of the land and any sale proceeds in order to pay them.

As Malcolm suggests the PRs could appropriate the entire asset but they would surely need either an undertaking that the legacies would be paid with an indemnity against default or an agreement that the PRs be irrevocably authorised to sell the land on their behalf and pay the legacies from the proceeds. I am not sure what this is in equity, whether a lien or charge of the PRs or just an estoppel against the legatees, though it must surely be enforceable, but a conveyancer will need to advise if any restriction etc is necessary. The PRs need consent to use the AEA s.41 power because any express power dispensing with consent is most unlikely to allow them to unilaterally impose the above arrangement (and hopefully the Will does not expressly exclude it altogether!).

No SDLT is the better view provided there is no equality money paid as between beneficiaries or to the PRs (convoluted combination of FA 2003 Sch 3 para 3A and Sch 4 para 1 reinforced by an analogy with para 16 but unhelpfully not specifically clarified at SDLTM00570).

Jack Harper

Thank you everyone.

The interests in the residuary estate are vested.

The Executors have now instructed me to disregard the administration expenses and legacies and appropriate the full value of the property to the residuary beneficiaries. They will deal with the expenses and legacies themselves. This is to avoid there being a CGT bill payable by the share retained in the estate.

I’m trying to wrap my head around whether this is likely to cause an issue or not? Any comments would be gratefully received.

The executors can do this but they are theoretically at risk without an indemnity if the legatees don’t do the right thing. I don’t get the CGT bill point. If the PRs sell there is a full bill for the estate and if the legatees sell after appropriation it is their full bill. The possibility of an appropriation of part and then a joint sale is not one I think that would occur to many if that is what is being canvassed.

Jack Harper

A “full” appropriation out to the residuary beneficiaries by the PRs results in a CGT charge on any furniture sale by the beneficiaries as opposed to a CGT charge should the PRs effect the sale. Normally, appropriations to beneficiaries by the PRs prior to any intended sale is common as any CGT charges are then potentially reduced due to multiple annual exempt amounts and possible lower rates of CGT.

However, from the non-tax perspective this does leave the PRs open to having to satisfy the expenses etc should the residuary beneficiaries not advance monies from the sale to the PRs to cover which expenses etc.

Malcolm Finney

I had a similar situation recently with a property that was carrying a large gain following the lifting of an agricultural restriction. We appropriated about 80% to the beneficiaries and the Estate retained the other 20% to pay costs and liabilities of the Estate and CGT on the eventual sale, (the Estate was liable as were the beneficiaries as their gains were in excess of their annual allowances). We had accountants work out all the calculations and they did all the tax returns, i.e. for the Estate and the beneficiaries, within the 30 days.

I did not mean to suggest that an appropriation of part could never be advantageous, as Esther so graphically illustrates. Only that I doubted that it would be in the precise context of the actual question posed. This is the strength of the Forum in action!

Jack Harper