Readers' Forum - Whose house?

The personal representatives of the deceased (who died in January 2000) dealt with probate which involved the deceased's house valued at £50,000. By his will it was left to the five children in equal shares. The personal representatives have sold the property for £130,000 (net) in May 2005. The property has remained unoccupied since death and has never been vested in the administrators as trustees, nor has it been vested in or appropriated to the children.
Personal representatives have an annual exemption for capital gains tax in the tax year of death and in each of the two following years and thereafter no exemption. Where it is intended to sell off an asset comprised in the estate after the expiry of that period and there is likely to be a chargeable gain on the sale, the appropriate course would be to vest the asset in the beneficiary entitled under the will to receive the proceeds of sale. We can only presume that the annual exemption would be due to the five beneficiaries.
Would there be a chance of HMRC accepting the argument that the property was being held by the administrators as bare trustees for those beneficiaries?
Has any firm successfully agreed the use of the annual exemptions in this type of case? If we could plead the case with the HMRC, do we write to the beneficiaries' local tax office?
Query T16,658         — P.R.

Reply by JdeS:

The position under the self-assessment régime is, unfortunately, quite clear. It is not possible to vest a legal estate in England and Wales in more than four persons. The gain would, therefore, only have been taxable upon the beneficiaries personally if the property had first been assented to them, either four of them as bare trustees for the five or the personal representatives in a similar (declared) capacity.
Had this been done, then the assent would have become compulsorily registrable at HM Land Registry by reason of Land Registration Act 2002, s 4(1)(a), and the sale would actually have had to be by them, rather than the personal representatives. Irrespective of in whose names the legal estate were to have been registered, FA 2003, Sch 16
para 3(1) would have required the five beneficiaries to be specified as the vendors on the form SDLT1 filed by the purchaser. A form SDLT 5 generated in the names of the former personal representatives would only be accepted by HM Land Registry as sufficient for them to proceed with the registration of the purchaser under FA 2003, s 79(3) had it been carried out by them as such (as indeed it was).
It will, also, be clear to HMRC from the SDLT 1 that the proper formalities for a sale to be treated as 'by' the beneficiaries have not been followed.
In consequence of the coming into force of the Land Registration Act 2002, any pre-2003 concession by a tax office based on the notion that the personal representatives had constituted themselves bare trustees for the residuary beneficiaries by some form of conduct would be of no value as a 'precedent'.
It has been assumed that each of the five children is absolutely entitled under the will, i.e. that any age (e.g. 25) which should have been attained for this purpose has been reached by all five. If not, then it would have been possible and (subject to quantifying the additional conveyancing costs) preferable for the personal representatives to have assented to (and registered) themselves as trustees of the will before sale. While the whole property would have been treated as remaining 'in trust' for capital gains tax purposes by reason of Stephenson v Barclays Bank Trust Co Ltd [1975] STC 151, a half personal exemption would have been obtainable by the trustees.  

Reply by Mike:

As a question of fact, the sale took place during the period of administration. Because of this, the personal representatives are liable to any capital gains tax arising. This could be substantial because no annual exemption is available in these circumstances.
As a corollary, and also as a question of fact, the beneficiaries have not disposed of an asset and are therefore not entitled to the annual exemption. They would have been so entitled if the personal representatives had transferred the property to them in specie as joint owners prior to sale.
The property would then have been deemed to have been acquired by the beneficiaries at its market value at the date of death. The inheritance tax value would be accepted for this purpose. The beneficiaries would each have been entitled to the annual exemption. Any liability to capital gains tax would have been theirs individually.
No annual exemption is due to the personal representatives in the current circumstances. No appeal to HMRC is warranted because no grounds exist for such an appeal. It would seem there is the possibility of a negligence claim dependent on the instructions held by the solicitors and accountants, the dates they were appointed and the relevant facts made known to them. The capital gains tax position should have been investigated prior to the sale, rather than afterwards; the likely substantial gain ought to have been apparent to the personal representatives and also the solicitors — if the same firm had been involved throughout.
It appears to me that any professional adviser acting in this matter would seem to be exposed to the possibility of a negligence claim.                                          

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