The following issue concerns confirmation of the beneficiary's CGT position on winding-up a trust created by will. The issue was raised with HMRC CGT Technical and it was requested that the position is made explicit in the HMRC CGT manual.
The concern is with circumstance where what may be quite a large and complex estate is left into trust where the beneficiary does not wish the trust to come into operation and the trustees are in agreement. (There could be more than one such beneficiary but reference here is to only one.) The unadministered estate assets are appointed to the beneficiary fairly early in the administration process, and certainly before any first distribution is made. At the time of the appointment (1) is coule be many months (in some cases years) before the estate is fully adminstered and the executors are ready to distribute assets, and (2) the final level of assets might be highly uncertain for many reasons (eg uncertainty over vaulations where assets are to be sold by the executors, creditors, IHT liability - for example where there is a substantial claim for normal expenditure out of income, etc). Clarification was sought as follows:
- Confirmation that no CGT arises on either the trust of the benficiary when unadministered estate assets left by will to a trust are appointed to a beneficiary and the estate assets are late paid or transferred to the beneficiary in accordance with the appointment made.
- Confirmation of the CGT analysis (as outlined below) and whether compliance with TCGA 1992 section 62(7)1.
- The possibility of including clarification in the CG manual.
It was noted that there are three separate CGT aspects to consider in this scenario.
The first in the position of chargeable assets within the estate . Here the CGT manual [CG31432] is clear the chargeable assets in the estate are treated as passing directly to the beneficiary and never as having become subject to the trust.
The second is the appointment of the rights to the unadministered estate out of the trust to the beneficiary. There are indications in the HMRC manual [CG32080] the trust is regarded as having never come into existence. On this basis presumably no capital gain arises on the disposal by the trust of its rights to the unadministered estate. This result is also mentioned in some commentaries but confirmation of HMRC practice here would be welcomed.
The third aspect is the CGT treatment of the rights to the unadministered estate it the hands of the beneficiary of the trust. The base cost to the beneficiary of these rights is market value at the time of the appointment. But due to uncertainties on the amount of any eventual distribution, and the potentially long delay before there is any distribtuion, the market value of these rights int he hands of the beneficiary may be heavily discounted compared with teh sum finally realised. (There could be circumstances where the beneficiary realises less than the initial value, for example where an asset is found to have a much lower value than would be assumed at the date of the appointment to the beneficiary, or where an unknown creditor comes to light.)
The understanding is that taxpayers and their advisers generally do not regard the scenario described as giving rise to any capital gain (or loss) and this is also HMRC's view. Please can this be confirmed.
The overall circumstances described would appear in almost all cases (ie subject to a two year time limit) to fall within TCGA 1992 section 62(6)1, subject to compliance with section 62(7). However it appears that generally in the circumstances described section 62(6)1 is not relied on to achieve the intended result where there is an appointment of the unadministered assets in an estate to a beneficiary. Manual CG31432 makes no reference to section 62(6)1. although reference is made to it in a similar context elsewhere in the CG manual.
HMRC CGT Technical responded:
'I can confirm that no CGT arises if the trustees of a will trust exercise a power in that trust to appoint assets in the residuary estate to beneficiaries before the residue of the estate is ascertained. This is the treatment described in CG31432 and does not rely on s62(6)1 and (7)1 as the effect of the exercise of the power of appointment is read back into the will so the beneficiary takes as legatee under a testamentary disposition. Plainly there cannot be any beneficial interest in residue until residue is ascertained but when it is ascertained it will vest in the trustees as modified by the evercise of the power. How this applies to a particular case will depend on the terms of the will trust, the terms of the deed of appointment or other method of appointment an the assets appointed.'
The CIOT understands that an addition will be made to the CGT manual at CG31432.
1 TCGA 1992 section 62 (6) provides that subject to subsections (7) and (8), where within the period of 2 years after a person's death any of the dispositions (whether effected by will, under the law relating to intestacy or otherwise) of the property of which he was competent to dispose are varied, or the benefit conferred by any of those dispositions is disclaimed, by an instrument in writing made by the persons or any of the persons who benefit or would benefit under the dispositions -
(a) the variation or disclaimer shall not constitute a disposal for the purposes of this Act, and
(b) th section shall apply as if the variation had been effected by the deceased or, as the case may be, the disclaimed benefit had never been conferred.
Section 62 (7) states that subsection (6) does not apply to a variation [unless the instrument contains a statement by the persons making the instrument to the effect that they intend the subsection to apply to the variation.]