Capital Gains Tax (CGT) is a tax on the profit made when you sell (or ‘dispose of’) an asset that has increased in value.
In the context of probate, if an estate asset (such as property or shares) has appreciated in value since the date of death, CGT may be payable on the gain. The amount owed is calculated on the difference between the probate value of the asset and the sale value, after deducting any allowance expenses and the estate’s annual tax-free allowance.
An estate's personal representatives (executors or administrators) are those responsible for considering and settling any CGT owed. When Capital Gains Tax is payable on assets sold during estate administration, it reduces the funds available for distribution to the beneficiaries as a portion of the estate’s assets is used to settle the CGT liability.
Some strategies can be employed to minimise CGT liabilities, including using a Deed of Appropriation. In this article, we’ll explain what this is, how it works, and when it might be used.
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What is the annual CGT allowance for estates?
Estates have an annual CGT allowance of £6,000. This means that gains up to £6,000 are typically exempt from CGT, subject to certain deductions.
If a property sells for more than £6,000 above the date of death valuation, the gain may be subject to CGT at 28%, after permissible deductions.
What is Appropriation in estate administration?
Appropriation is a process where an estate asset expected to yield a significant gain is sold on behalf of the beneficiaries rather than the estate itself.
Appropriation can be advantageous if:
Beneficiaries are basic rate taxpayers and selling the asset on behalf of the beneficiaries may result in a lower tax rate compared to selling it through the estate.
Beneficiaries are charities.
There are multiple beneficiaries entitled to the residuary estate, allowing for the application of multiple annual tax-free allowances against the gain, potentially reducing overall tax liability.
What is a Deed of Appropriation?
A Deed of Appropriation is a legal document that allows the executor or administrator of an estate to allocate specific assets to beneficiaries before they are sold.
Transferring the asset to the beneficiaries before the sale may reduce CGT liability as the beneficiaries can use their personal tax allowances when the asset is sold.
What are the legal requirements for creating a Deed of Appropriation?
If the beneficiary agrees to the appropriation, a Deed of Appropriation is drafted and sent to the beneficiary (or beneficiaries) to be signed. Once signed and dated, the asset is no longer held by the estate but instead held on behalf of the beneficiaries.
A Deed of Appropriation should be drafted and executed properly to ensure it is legally binding. An expert wills, trust, and probate solicitor can help to ensure compliance with all legal regulations and to maximise the benefits of using a Deed of Appropriation.
When should the Deed of Appropriation be signed?
A deed of appropriation must be signed and dated before the asset is sold to ensure that it is officially transferred to the beneficiaries before the sale.
Deed of Appropriation example
James, Emma, and Daniel are the residuary beneficiaries of their late aunt's estate. At the time of her passing, her property was valued at £280,000.
Throughout the Estate administration period, the property's value has appreciated, and the Personal Representatives have recently accepted an offer for £320,000. The £40,000 difference is subject to Capital Gains Tax.
Since James, Emma, and Daniel have not incurred any chargeable gains in the current tax year, they chose to appropriate the property to themselves before its sale. They decide to proceed with a Deed of Appropriation, which they all sign before the property sale exchanges contracts.
As a result, the beneficiaries each use their annual tax-free allowances, collectively exceeding the £40,000 gain on the property. As a result, there is no Capital Gains Tax liability to settle.
Had the property been sold through the estate, only one tax-free allowance would have been available to offset the gain. This would have led to a Capital Gains Tax liability on the remaining amount, taxed at 28%, diminishing the funds available for distribution among the beneficiaries.
How can Lawhive help?
At Lawhive, our network of expert wills, trust, and probate lawyers are on hand to help with estate administration for affordable fixed fees.
If you’re exploring strategies like appropriation or need a legally binding Deed of Appropriation drafted for you, we’re here to help. Contact our Legal Assessment Team today to get a free case evaluation and fixed fee quote.