The Gazette 1979

APRIL 1979

GAZETTE

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, 49

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. (c) In the context of Capital Gains Tax, the concept of 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