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CGT Disposal: Crowe v Appleby

Whether or not there has been a disposal for capital gains tax purposes is obviously important. Where there hasn’t been a disposal (or deemed disposal) there will not be a capital gains tax charge. Whilst in most circumstances it is relatively obvious whether there has been a disposal or not, where trusts and life interests are involved it can be substantially more complicated. This is where it is important to remember the case of Crowe v Appleby.

Crowe v Appleby [1975] 1 WLR 1539 is not a new case – quite the contrary, it is a case from 1975, but it is still a relevant case and can easily be forgotten.

The key provision considered in Crowe v Appleby is section 71(1) of the Taxation of Chargeable Gains Act 1992 (“TCGA 1992”) which provides as follows:
“On the occasion when a person becomes absolutely entitled to any settled property as against the trustee all the assets forming part of the settled property to which he becomes so entitled shall be deemed to have been disposed of by the trustee, and immediately reacquired by him in his capacity as a trustee within section 60(1), for a consideration equal to their market value.”

Of particular importance is the meaning of “absolutely entitled […] as against the trustee”

Background
The background to Crowe v Appleby is relatively straightforward. The Deceased left some freehold properties on a life interest trust for his five children with remainders over. In 1952 one of his children died and his share devolved on his child absolutely. In 1968 a second child died, and her share devolved on her two children as tenants in common. In 1969 the trustees sold the property making a gain. The taxpayer, one of the trustees, was assessed to capital gains tax for 1968/1969 when the second child died on the basis that the trustees were deemed to have disposed of the whole trust property and in 1969/1970 on the chargeable gain which accrued on the sale of the property.

The trustees appealed both assessments.

The Assessment on the Death of the Second Child
The first part of the judgment concerns what is now section 72(5) TCGA which provides as follows:
“(5)   If there is an interest in a part of the settled property and, where that is an interest in income, there is no right of recourse to, or to the income of, the remainder of the settled property, the part of the settled property in which the interest subsists shall while it subsists be treated for the purposes of this section as being settled property under a separate settlement.”

HMRC assessed the taxpayer on the whole of the settled property when the second beneficiary died but the taxpayer argued that (now) section 72(5) TCGA applied and so only 1/6th of the settled property should be assessed to tax, not 100%.

The Court determined that the taxpayer succeeded on the basis of Pexton v Bell [1975] 1 WLR 707.

Was all the property settled at the time of the sale of the property?
This second point addresses an important question for capital gains tax purposes which is when property is disposed of on the occasion of a life interest coming to an end in circumstances where the trust holds freehold land.

Most types of property held on trust will be easily divisible into shares and as such the difficulties which arise in relation to land will not arise. Where property is easily divisible, it is possible for beneficiaries to direct trustees how to deal with their individual shares – a key requirement for a disposal under section 71(1) TCGA. 

In relation to land, whilst it is possible for shares to vest indefeasibly, it is not possible for the beneficiary to direct the trustees how to deal with it until each share has vested. They (alone or together with other trustees) cannot call upon the trustees to account to them their shares of the assets until the land is sold or until every beneficiary’s share has vested. 

As a result, there will not be a disposal under section 71(1) TCGA until all the shares have vested or the land has sold.  

HMRC have confirmed that this is how Crowe v Appleby applies in CG27510P:
“In English law, if the settled property is land in England or Wales, the decision of Goff J in Crowe v Appleby, 51TC457, shows that there is no occasion of absolute entitlement on the occurrence of any contingency other than the final one. The land as a whole remains settled property, and any actual disposal of it is a disposal entirely by the trustees. The beneficiary has no right to call upon the trustees to transfer to him or her a divided share of the land or to create a tenancy in common, see CG70500+”

​Why this matters?
Crowe v Appleby will be of most practical relevance in circumstances where trustees hold freehold land on trust where the beneficiaries have an interest in possession. When a beneficiary’s life interest comes to an end resulting in the remainderman becoming entitled to that individual share there will not automatically be a deemed disposal. Care will need to be taken as experience has shown that if you pay the capital gains tax incorrectly, HMRC will not allow it to be a down payment towards a future tax liability. Getting it wrong could have real tax consequences and so advice should be taken. 

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