What is a Deed of Appropriation?

During probate, if an estate asset is sold which has increased significantly in value since the date of death, then Capital Gains Tax may be payable on it. A Deed of Appropriation can reduce the Capital Gains Tax liability by allocating the asset to the beneficiaries before it is sold, so that it's held on their behalf instead of on behalf of the estate.

This means that the beneficiaries' personal tax allowances can be applied when the asset is sold, as shown in the Deed of Appropriation example below. This is also effective for charitable beneficiaries as charities are exempt from Capital Gains Tax.

Capital Gains Tax in probate

If an asset is sold at a much higher value than it was at the date of death (the probate value) then this could result in Capital Gains Tax being payable. When dealing with an estate, the personal representatives are responsible for taking into consideration and settling any Capital Gains Tax payable.

Capital Gains Tax is due on the difference between the probate value and the sale value, less any expenses and less the estate's annual tax-free allowance.

It is very common for assets such as a property or a portfolio of shares to increase in value during the Estate administration period. If the personal representative sells the asset on behalf of the estate, then the estate bears the responsibility for paying the Capital Gains Tax.

This ultimately reduces the estate funds that are left to distribute to the beneficiaries.

Reducing tax liability through appropriation

If an estate asset is expected to sell for a substantial gain, it can be more tax-efficient to sell the asset on behalf of the beneficiaries, rather than on behalf of the estate. This process is known as appropriation.

This is particularly beneficial if: - the beneficiaries are basic rate taxpayers, as the tax payable would be at lower rate than it would be for the estate (basic rate is 18%, compared to 24% if sold through the Estate) - the beneficiaries are charities, as they are exempt from Capital Gains Tax - there is more than one beneficiary entitled to the residuary estate, as there would be multiple annual tax-free allowances to apply against the gain.

Using a Deed of Appropriation

It is possible to appropriate an asset such as a property to a beneficiary with a legal document called a Deed of Appropriation.

The Deed of Appropriation would need to be signed and dated before the asset is sold. If done correctly, it would mean that the asset was no longer held by the estate, but instead held on behalf of the beneficiaries.

By selling the asset in this way, the beneficiaries can utilise their own annual tax-free allowances, provided they have not made any other chargeable gains in that tax year. Having multiple annual allowances instead of just one reduces the overall Capital Gains liability.

Deed of Appropriation example

Susan, Laura and Robert are the residuary beneficiaries of their late father's estate. At their father's date of death, his property was valued at £310,000. Over the course of the estate administration, the property has increased in value, and the personal representatives of the estate have accepted an offer on the property of £340,000. The £30,000 difference (subject to any allowable expenditure) is liable for Capital Gains Tax.

As Susan, Laura and Robert have not made any chargeable gains during the current tax year, they decide that they would like the property to be appropriated to them before it is sold. A Deed of Appropriation is drafted and signed by all three of them ahead of exchange of contracts on the property sale.

As the property now belongs to them in equal shares, the beneficiaries are able to apply three annual tax-free allowances, and although this does not exceed the £30,000 gain on the property, it will reduce the amount of Capital Gains Tax liability to pay.

However, if the property had been sold through the estate, there would only have been one tax-free allowance to use against the gain. This would have resulted in a larger Capital Gains tax which would have been paid out of the estate, reducing the funds left over for distribution to the beneficiaries.

Advice and guidance on a using Deed of Appropriation

With our Probate Complete Service, our probate specialists will review the estate assets and establish with the personal representatives whether these should be sold or transferred.

We can offer advice and guidance on whether a Deed of Appropriation should be used to limit the Capital Gains Tax liability and we can arrange for the Deed to be put in place if necessary.

We can also arrange for the sale or transfer of property or other assets on your behalf. With our probate service, we take full responsibility for getting Grant of Probate and dealing with the legal, tax (excluding VAT), property and estate administration work.