Head of Charity Estate Administration
Charities | Legacies | Private Wealth
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It is estimated that HMRC will collect £17.8billion in Capital Gains Tax (CGT) in 2023/24 which is an increase from £14.9billion in 2021/22. This is further estimated to increase to £26.1billion by 2027/28.
Following our article in April 2023 on the reduction of annual exempt amounts for CGT, these increases do not come as a surprise. For Personal Representatives (PRs) administering estates, it is more vital than ever to consider appropriation of assets to mitigate any CGT liability.
Appropriation is a decision by the PRs to allocate a particular asset to the share of the estate due to a beneficiary or group of beneficiaries prior to its sale/disposal. No physical transfer of the asset is required. The asset is then held by the PRs as "bare trustees" for the beneficiary. As a result, the beneficiary's personal tax circumstances are applied for CGT purposes when the asset is later sold by the PRs. Most commonly, this would be considered for properties and stock market investments.
The bottom line is usually to save tax.
PRs pay CGT at a rate of 28% (on residential property) or 20% after deducting the annual exempt amount of £6,000 in the 2023/24 tax year. CGT rates for basic rate taxpayer individuals will depend on their personal circumstances but the starting rates for CGT are lower than for PRs. Also consider potential tax savings for the following:
PRs should check any provisions in the will regarding appropriation or, failing that the statutory power under s41 Administration of Estates Act 1925 will apply.
It is best practice for the PRs decision to be evidenced in writing, usually by a Deed or Memorandum of Appropriation, and communicated to the beneficiaries. Contemporaneous evidence (e.g., an exchange of emails between the PRs or records of oral statements) can be sufficient.
By appropriating, the PRs effectively declare they hold the asset as a bare trustee for the beneficiary who is then absolutely entitled to the proceeds once sold. Appropriating to save tax too early in the estate administration process might expose the PRs to risk if:
Making the decision to appropriate assets can be complicated and there is often no easy solution that fits every situation perfectly. With a further reduction in the CGT annual exempt amount due in April 2024 timings for disposals between now and then are likely to cause some concern.
With little room for manoeuvre after that, PRs will need to be especially vigilant when disposing of assets to ensure they are doing their best to maximise the estate for the beneficiaries
Our Charity Probate team has extensive experience in advising PRs in these matters for both exempt and non-exempt beneficiaries so please contact a member of the team if you would like further information.