I agree entirely with your view that the trustees currently own simply a chose in action: the right to have the estate duly administered.
The legal authority on this is vestigial. Williams Mortimer & Sunnucks devotes only about 20 sentences to it. They cite Lord Sudeley v A-G [1897] 2 AC 1. It is only when administration is complete that a legatee becomes a beneficiary. He does not have meanwhile any interest in any specific asset. A residuary legatee has the right to be paid the residue on completion of the admin period. Until then he has a “composite chose in action” but which is transmissible (see e. g. Marshall v Kerr [1995] 1 AC 148).
In Daffodil v IRC [2002] STI 786 the Special Commissioners held that this right was an asset of the surviving spouse’s estate per s.5(1) IHTA. The facts were rather basic. Spouses owned their PPR as tenants in common and the SS was entitled to the deceased’s half share. The son was granted letters of administration to the widow’s estate and argued that the half share was not an asset of it at all, seeking to completely avoid tax on the second death. In many cases the facts will be more complex: first, unadministered assets may be of a greater variety and the end of the AP may not be a single event but may occur piecemeal quoad each asset as it ceases to be required for administration.
The tax issue is further complicated by s.91. It talks about an interest in possession but, while no case has so decided, HMRC thinks that it encompasses an absolute interest: IHTM22011. So as ever this is where the bar is set until challenged successfully.
S.91 requires the operation of a fiction: that the deceased beneficiary be treated as owning immediately after the date of the death of the testator the assets that eventually form residue as and when it is subsequently ascertained. The section is convoluted annd opaque and IHTM22025 is not a great improvement. Often there will be some delay before the nature of the assets comprised in residue are ascertained. 6 years in your case and counting. The only clear effect of s.91 is that those assets are to be regarded as retrospectively acquired as at the moment after the testator’s death and not when later ascertained.
So when submitting the IHT400 and IHT 415 you must use an estimated value if and to the extent that such assets are not yet identified. In Daffodil HMRC optimistically tried to levy a penalty on the PR for undervaluing but this was chalked off because he had filed “to the best of his knowledge and belief”.
But now comes the controversy. In IHTM22022 Example 1 Akash’s estate for s.5 is £415,000. The example seems to end up charging £475,000 gross. Oi Oi, where did the extra £60,000 come from? The first deceased’s estate cannot be augmented in value by the subsequent appreciation of assets between death and ascertainment of residue. But can the estate of the second to die? This seems hard to resist as s.5 must operate as of that date and assets of the second to die be valued as of then.
S.91 says absolutely nothing about valuation so if the second deceased is to be deemed to be entitled to the estate of the first immediately AFTER the death of the first it is hard to see (when he is entitled to the entire residue) how the section directs that it is the actual assets acquired later when ascertained that should be revalued. HMRC certainly seem to think that this is what the fiction permits. And in the example it means that although only a half share of Whitehouse was inherited at the moment after the death of the first to die the discount disappears on the second death as by then the entirety is owned by the second to die. The calculations are not explicit.
All I can really grumble about is the drafting of s.91 which ought to have made clear what it means by “interest in possession” and the exact operation of the fiction as regards valuation. This is a significant derogation from the OMV principle: the valuation of the chose in action, the real world asset, would permit factoring in prospective delayed receipt and any then subsisting contingencies just as would be applied to determining the OMV of a cash receivable.
And there is no corresponding CGT provision like s.91. There the actual assets of which the deceased is competent to dispose are deemed to be acquired by his PRs at OMV under s.62(1) and can be passed once residue is ascertained to the legatee at that same OMV. If the legatee dies before that is done his PRs stand in his shoes and one might deduce that s62(1) should apply to the chose in action: CG30760, 31850. CG31940P et seq and especially 32000 hint however that hindsight will be operated here also, so that s.62(1) will apply to the actual assets received by the dead legatee’s PRs once residue is ascertained but at their OMV when the legatee died.
For both taxes HMRC have apparently tried reasonably to make the best of the bad job botched by the drafter of the statute, who either overlooked or deliberately ducked the inconvenient chose in action legal reality.
So on winding up a DT actually at the time owning a chose in action which is a right to an unadministered estate:
1 the DT commences on the death of the testator: s.83 IHTA. This is when relevant property first becomes a trust asset, although a chose in action in the real world.
2 the initial value for s.68(5)(a) is apparently the ultimate value of the actual assets received when residue has been ascertained:s.91. Presumably as estimated though no further statutory or case law guidance is extant. The initial value is not relevant under s.69.
3 the chargeable amount under s.65(2)(a) is, on a full distribution, the value of all the relevant property distributed in the real world—still a chose in action—but to be consistent in applying s.91, an estimated value of the assets which the transferee(s) will ultimately receive on the eventual ascertainment of the residue.
This puts the trustees in a quandary as they are jointly liable for any underpaid tax per s.201. So they must take an indemnity from the transferee(s) or try to do a deal with HMRC that they will only pursue the other persons liable under s.201 including the transferee(s). It is obviously impracticable and probably a legal nonsense to distribute only part of a unitary chose in action or take an equitable charge over it.
Or they can wait to distribute until residue has been ascertained and meanwhile consider and take advice over whether the delay is actionable. After all the chose is not as such currently worth much to the transferee(s) since to all intents and purposes unrealisable and poor security for a loan. Although the residue may be worth more in due course s.91 will ensure that any increase in value is charged to tax on someone.
What is driving the plan to distribute now?
Jack Harper