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Capital Tax Review by Matthew Hutton, MA, CTA (Fellow), AIIT, TEP

Matthew Hutton MA, CTA (fellow), AIIT, TEP author of Capital Tax Review, comments on circumstances in which a deed of variation may not be desirable for CGT purposes

Context

It is well known that, as against IHT (where a deed of variation is effective for all IHT purposes), the CGT provisions under TCGA 1992 s 62(6) simply prevent the variation itself from being a disposal. But the rest of the capital gains legislation (and specifically the anti-avoidance settlements rules, whether for UK or non-UK resident settlements under ss 77 and 86 respectively) continue to apply on the basis that the original beneficiary is the settlor.

It is sometimes better not to elect

On occasion, it will sometimes appear desirable not to import s62(6), for example in a case where the original beneficiary can secure a tax-free uplift based on main residence relief. Suppose that A dies leaving his one-half share in the family home to his wife B. B, who is still living in the house, decides to execute a deed of variation giving the share to the children. If some time has passed since death and the children are not in occupation, it might be better not to apply s62(6), to give the children the highest possible base cost. If this route is being considered, make sure that the administration of the estate has been completed. Otherwise, there is a serious danger that B will dispose of an asset (her right to due administration of the estate) with no base cost and no main residence relief.

The CGT advantages of a pre-emptive appointment

What about a case where an asset is left to a discretionary trust and the trustees wish to appoint out to beneficiaries absolutely? If, by the time they decide to do this, the asset has risen in value, they must wait until two years have passed, to obtain hold-over relief on non-business assets (because there is no chargeable transfer: IHTA 1984 s144(2)). Even that may be undesirable if the beneficiaries may wish to occupy the property as their main residence in the future. In that case, consider an appointment by the trustees before the administration has been completed (see the HMRC Capital Gains Manual CG31432-31433): the beneficiary under the trust effectively takes on an acquisition value at the date of death.

(Points made by Sarah Dunn at IBC’s Fourth Annual Private Client Tax Conference in London on 4 July 2005, included in a Meeting Points article in Taxation 8.9.05 p 638)

Comment

While generally it may be the case that CGT need not be considered in much detail for disposals within a year or two following death, it is always ‘the exception that proves the rule’. And there will be a number of cases where the gains, whether on a family home or on stocks and shares, can be quite considerable. It is then that the issue needs to be spotted well in advance and appropriate planning action adopted.

October 2005

Matthew Hutton MA, CTA (fellow), AIIT, TEP author of Capital Tax Review

More Information

The above article has been taken from Matthew Hutton’s Capital Tax Review, a quarterly update for professional advisers of private clients. For more information, visit http://www.taxationweb.co.uk/books/capital_tax_review.php.

About the Author

Matthew Hutton is a non-practising solicitor (admitted 1979), who has specialised in tax for over 25 years. Having run his own consultancy (latterly through Matthew Hutton Ltd) until 30th September 2000, he now devotes his professional time to writing and lecturing.