Testator died intestate, leaving a property which, under the intestacy rules, passed partly to the surviving spouse and partly to the adult children. The property was never formally transferred as the family were considering a variation of the intestacy to give more to the adult children. However, nothing happened and more than 3 years has now passed since the death.
If the property is now transferred to give more to the children, is this treated as a transfer by the surviving spouse for CGT purposes in respect of the part he is giving up, despite the fact that the house was never formally transferred out of the estate?
I would be grateful for any views on this?
The intestacy rules do not give anyone any particular asset, apart from the personal chattels which pass to the surviving spouse absolutely.
The PRs have the power of appropriation conferred by s41 ARA 1925 and can appropriate a specific asset to the SS with his consent up to the value of his share of the estate. If the value of the asset is greater the beneficiaries whose share would be reduced must agree, a problem if any is a minor with only a contingent interest to boot!
This would be a PET for IHT and a disposal/part disposal of their right under the estate or of any chargeable asset already appropriated to the beneficiary in question if the child had attained 18.
Correspondingly, as in the OP, if the SS takes a smaller share he will make a PET and CGT disposal unless he gives away cash from the statutory legacy.
PET treatment, where the gift is not to an Individual is dependent on the transferee’s IHT estate being increased and it will not be if at the time the statutory trust is operative: the minor has a contingent interest in a settlement but which is special Bereaved Minor’s Trust under s71A IHTA. However, a lifetime gift to a BMT is only a PET if it follows the termination of an IPDI and that is an IIP in “settled property”. The statutory legacy is not such. A gift to an adult child with a vested interest is to an individual.
So the SS should make a gift “to an individual” out of that monetary amount to any minor children on a bare trust, excluding s31 TA 1925 for safety (though HMRC seem to be relaxed where the minor’s interest is absolute so that any income arising that was not distributed would pass to the minor at 18). That is a quite different trust to the statutory trust where the interests are contingent and s.31 applies. A bare trust is not settled property for CGT.
Once that is done, the house, or such interest in it, comprised in the intestate estate can be appropriated to the bare trust as far as possible. The gift of the statutory legacy is outside CGT so my analysis is that the house/part would pass to the bare trust under s62(4) TCGA 1992.
Jack Harper
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Jack,
Many thanks for responding.
There are no minority interests here and there is no cash; there was just the deceased’s property which exceeded the value of the statutory legacy.
The SS wants to give up part of his share of the stat legacy (outside the 2 year period for a possible DoV).
So have I understood correctly that this would be a PET by the SS and a CGT disposal of the amount in excess of this stat leg entitlement under the intestacy?
CGT
1 I agree. The CGT base cost will be the date of death value. There may be some PPRR: s225A TCGA. Strictly the PRs are apparently still in charge since they cannot, as things stand, pay out the statutory legacy without selling the property. On the face of it therefore “residue has not been ascertained” because until the net sale proceeds of the property are in hand the PRs cannot be certain how much is distributable or to whom. This may mean that the variation of the intestacy rules will not in itself be a disposal of the property asset.
2 You should read the CG Manual at CG30940 but also the entire section at CG39140P and especially CG320000. HMRC’s view is that a variation of the prospective right to assets in an unadministered estate for no consideration is not a disposal at all as matter of property law so that when the assets are appropriated by the PRs to those now entitled to them post-variation (here, shares in the only asset) they acquire it at market value on the date of death “as legatee” under s62(4) TCGA. At that same moment the legatee who is making the gift, here the SS, will be regarded as making a disposal to the donee, here the children, of part of the asset he is has acquired from the PRs and is giving away by the variation. Because the acquisition and disposal take place instantaneously no gain arises as a matter of computation, base cost and disposal value both being equal to market value. In fact there may be a loss where there is a part disposal as the market value of the part disposed of will be discounted: the loss is a “clogged” loss so of limited usefulness: s18 TCGA.
IHT and GROB
3 It also means that the PET will be calculated on the loss to donor basis which will be greater than the value of the asset given away, since the part retained will also have a discounted value thereafter. The GROB rules need to be considered. s102B FA 1986. You do not say who if anyone is in occupation. If the SS is then he needs to bring himself within either subsection (3) or (4) dependent on the facts. Strictly this may not matter immediately but one or other subsection must apply during the key GROB period which is the 7 years before death.
"(3) This subsection applies when the donor—
(a) does not occupy the land; or
(b) occupies the land to the exclusion of the donee for full consideration in money or money’s worth
(4) This subsection applies when—
(a) the donor and the donee occupy the land; and
(b) the donor does not receive any benefit, other than a negligible one, which is provided by or at the expense of the donee for some reason connected with the gift."
And “occupy” is not defined, Given HMRC 's general practice, aimed at finding a GROB if at all humanly possible, very little by way of occupation suffices: IHTM14333-4. It is inconceivable that it has a different meaning in one part of the GROB code and not in another part of it. Under ToLATA 1996 ss12 and 13 the donees have a right to occupy (not defined here or elsewhere!) unless excluded by agreement. Property law tends to use the terms possession and control of premises and to designate the latter as a dwelling-house or living accommodation. So “occupies” may not equal the right to occupy in s102B but may denote use or physical presence and habitation. Adult children may have a right to occupy but may not in fact occupy. HMRC does not trouble itself with such niceties, preferring to keep it vague and elastic so they can adopt whatever position suits them at the time.
POA
4 Unfortunately it is probably necessary for one or both subsections to be applicable immediately and at all times thereafter until the sale of the property or the death of SS. This is because of the iniquitous income tax impost known as the Pre-owned Asset Charge. This will not apply when SS is not in occupation but that, correspondingly, must mean does not have the right to occupy either: subsection (3)(a) s102B. It will not apply where subsection (3)(b) applies or subsection (4) due to an exemption in FA 2004 Sch 15 para 11 (3) and (5) (d) and (c) respectively. See IHTM44047-8.
How to attract s102B (3) or (4)
5 There is an inevitable uncertainty about what is full consideration in subsection (3)(b) of s102B and what cost contribution the donee must make to the donor by meeting or reimbursing costs to avoid the donor having a benefit which is not negligible in (4)(b). HMRC Guidance is skimpy on full consideration: IHTM14335 and 14341. It is non-existent on what a benefit is at IHTM14350, unhelpful whether or not deliberate. 14333 indicates what they consider a benefit to be but it is silent on how it might be avoided by payment or otherwise like services e.g. providing free care to a parent.
Jack Harper
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