When is it appropriate to Appropriate for charities?

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.

What is Appropriation?

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.

Why do it?

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:

• Charities who are exempt from paying CGT (s256 Taxation of Chargeable Gains Act 1992).
• Multiple beneficiaries can each apply their annual CGT allowance meaning more than one annual exempt amount can be used against the same gain.
• Non-UK resident beneficiaries who may not be liable to CGT on UK assets (excluding land).

How do you do it?

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.

Sounds good, what's the catch?

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:

• They have not considered all claims, costs, and gifts in the will.
• The estate becomes subject to a claim under Inheritance (Provision for Family & Dependants) Act 1975 after appropriating a valuable asset.
• There are conflicting interests of beneficiaries who have different circumstances to consider.

Top tips for PRs

1. Revisit asset values regularly to check what has changed before making decisions – don't leave it to the day before exchange of contracts on a property sale to think about it!
2. Consider if the estate has made capital losses in the same tax year that the PRs could offset against gains?
3. If the beneficiaries are charities, consider the requirements of s117 and s119 Charities Act 2011
4. Were assets held in ISAs prior to the death? These investments are still exempt from CGT when sold by the PRs up to three years post death, so appropriation is not required
5. Early discussion with beneficiaries is key - the aim of the game is to keep them happy after all!
   • Would the beneficiaries prefer to have assets transferred to them rather than sold?
   • As appropriation pushes responsibility on to the beneficiaries to report the gain, they should be made aware of their obligations and provided with clear information to enable them to do so.
   • Remember that CGT on property/land transactions must now be reported with 60 days of completion.
6. Various factors might mean it is less attractive to appropriate to certain beneficiaries:
   • Higher or additional rate taxpayers will pay a higher rate of CGT than the PRs so may not be better off in the long run.
   • Beneficiaries may have already used the annual exempt amount for CGT.
   • Cost implications for the beneficiaries who may need to employ an accountant to submit tax returns on their behalf to declare their gains and pay the tax liability.
   • Beneficiaries may perceive it is "too much hassle" and not want to have assets appropriated

How can we help?

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.