The Gazette 1979

GAZETTE

APRIL 1979

Distributions- Appropriation

When it is appropriate to consider distributions to

beneficiaries, the manner in which these are made does

have a direct bearing on the incidence of the new Capital

Taxes - a few practical examples relative to the various

Taxes will illustrate the points at issue.

(a) In relation to Capital Acquisition Tax, the

availability of Government Stocks to surrender at par in

discharge of this Tax is allowable only where the Stock in

question forms part of the beneficiary's entitlement from

the Estate and was held by the Testator for a minimum

period of three months prior to death. Hence, the Execu-

tor should consider appropriating such a holding in satis-

faction of the beneficiary's entitlement. Care must be

taken, however, to ensure that the powers of

appropriation are exercised equitably and the one

beneficiary is not favoured as against another. A further

example of achieving an effective saving of Tax would be

to appropriate such Government Stocks to a beneficiary

who is normally resident and domiciled abroad since such

holdings are effectively exempt from C.A.T. if held by the

deceased as at 14th April 1978 or for a minimum period

of three years.

(b) Having regard to the surviving spouse exemption in

relation to C.T.T., U.K. assets should be appropriated in

satisfaction of bequests to the surviving spouse under the

Succession Act 1965 - a matter which should not be over-

looked in the context of the spouse's right of election.

Further, certain U.K. Government Stocks are exempt

from C.T.T. in the hands of a non-resident domiciliary and

care should be taken to appropriate these Stocks to a

beneficiary who is resident and domiciled outside the U.K.

appropriation is certainly relevent in considering

avoidance of this Tax insofar as it might apply since

assets transferred directly by the Executor to a bene-

ficiary are deemed to have been acquired by the

beneficiary at the date of death value of the said asset thus

not giving rise to a C.G.T. liability in the hands of the

Executor which would be the case if the Executor sold

the assets in question and transferred the proceeds to the

beneficiary .The incidence of C.G.T. may not be of great

import having regard to the tapering rate and indexation

reliefs - except as pointed out earlier where there is an

undue delay between the date of death and the date of

disposal of the relevant assets by the Executor.

Limited Interests

The reference to "beneficiaries" has been intentional in

the context that it was not appropriate up to this point at

least to distinguish between Legatees, Specific Devisees,

Life Tenants, Residuary Legatees etc. In broad terms, the

differentiation where the Estate is being distributed out-

right is not of significance from a C.A.T. point of view.

However, in relation to limited interests arising in an

Estate, the implications of the Tax assessments can be

quite different and complicated depending on the nature

of the said interests. For example, in relation to a life

interest situation, the Tax is assessed having regard to the

age and sex of the life tenant and the value of the property

in which the life interest subsists. However, it must be

remembered that the life tenant is liable and primarily

accountable for the Tax, though having regard to the

Provisions of Section 35 (8) of the Act, the person so

accountable shall have power to raise the amount of such

Tax by the sale or mortgage of or a terminal charge on

"the property" in which the life interest subsists. It is

suggested that the power to sell or mortgage for payment

of Tax given by Section 35 (8) is in the case of the life

tenant restricted to selling or mortgaging the life interest

and does not extend to the capital in which the life interest

subsists.

The implications are such as to prevent an

Executor/Trustee from discharging the C.A.T. liability

out of the capital of the Funds in which the life interest

subsists since to do so would be to the detriment of the

remaindermen. On the other hand, it seems extremely

onerous on the life tenant that he or she has to find a

substantial sum to discharge the Tax on the commence-

ment of the life interest.

A brief example will best illustrate this point.

'A' leaves a life interest in a sum of £100,000 to Ms.

Smith aged 63 years at the date of 'A's death. The

taxable value of the life interest having regard to Table

A in Part II of the First Schedule of the Act would be

60% or £60,000. Assuming no prior usage of thres-

hold, the Tax applicable is £15,600.

The liability has to be met by the life tenant and is due

in practice shortly after the date of 'A's' death, almost be-

fore an income flow has commenced. Any delay in dis-

charging the liability will give rise to an interest charge,

the rate of interest l-J-% per month is equivalent to 15%

per annum and the interest is not an allowable deduction

for Income Tax purposes, hence when grossed up for

a 60% Tax payer is equivalent to 37 |% per annum.

A further relevant point — there is no provision in the

C.A.T. legislation for Quick Succession Relief. Conse-

quently, if the life tenant died shortly after succeeding to

the life interest, in theory at least, she could have paid

more in C.A.T. than her income entitlement. However,

where the Tax is paid by instalments, Section 43 (5) of the

Act provides that where the donee or successor who has

taken a life interest dies before all the instalments have

become due, these instalments due after the date of death

will not be payable or if paid will be refunded. Further it

will be noted that Section 44 of the Act empowers the

Revenue to agree to a postponement remission or

compounding of the Tax in certain circumstances.

If the liability to Tax is intolerable, of course, one has

the ultimate option of disclaiming the bequest or legacy as

provided for in Section 13 of the Act but before con-

sidering such action, careful thought must be given to the

consequences. There may perhaps be other ways of

achieving a Tax saving as indeed there are, some of which

require pre death planning, others can be achieved in the

post death situation.

WILLS

In addition to pre death planning, the key to Tax

saving lies in the manner in which the Will is drafted,

coupled with consideration of making lifetime gifts.

Obviously, care will be taken to ensure maximum usage

of thresholds in line with the Tastator's wishes and further

the possibility of avoiding a liability to C.A.T. by dividing

out the assets likely to be subject to the Tax between a

number of beneficiaries should be considered. However,