What is a deed of appropriation?

What is a deed of appropriation? Adam Sym of Trustestate explains how they can be used in estate administration and outlines some possible tax benefits.

What is a deed of appropriation?

A deed of appropriation is a legal document that formally records when personal representatives (PRs - the executors or administrators of the estate) have used ‘powers of appropriation’. Powers of appropriation are powers which enable PRs to give beneficiaries an estate asset in specie – in its actual form – as all or part of their inheritance, instead of liquidating it or selling it.

For example, someone might receive a house, instead of receiving the money after the house is sold. The asset is ‘appropriated’ to the beneficiary.

What is included in a deed of appropriation?

A deed of appropriation will generally include:

details of the PRs
details of the beneficiaries (those who will inherit)
details of the deceased
details of the estate asset being appropriated to the beneficiaries, along with the division of the asset itself
the authority on which the appropriation is being made, whether this is the statutory power provided by s41 Administration of Estates Act 1925 or an express power contained within the will

When are deeds of appropriation used?

There are some common situations during estate administration where PRs or beneficiaries might like to consider using powers of appropriation, including:

Wishes of the beneficiary – a beneficiary might prefer to receive a particular asset instead of its cash value. It might be of more use to them than its market value in cash, or it might have sentimental value.
Difficult-to-sell assets – if it’s difficult to find a buyer for something, and this is delaying the estate administration, the PRs might seek to appropriate these assets to the beneficiaries. This can allow the administration to conclude.
Capital Gains Tax (CGT) planning – appropriating assets to beneficiaries can bring significant tax advantages if those assets are likely to be sold for more than their ‘date of death’ value (explained more fully below)

Appropriation of assets doesn’t have to be in writing. With informal arrangements, there can be less need to provide evidence of the appropriation in a legal document. The asset will simply be handed over to the beneficiary, and this appropriation recorded within the estate accounts.

However, a written document to confirm the position can be very useful. For example, it’s a good idea where there is a CGT implication, or there are some other situations where written evidence of the appropriation, and/or the agreement of the beneficiaries is likely to be required.

A deed of appropriation is one way of achieving this and is the most formal route. For a deed to be formally recognised, each party to the deed must sign in the presence of an independent witness over the age of 18, who should then also sign and insert their details.

A less formal method is using a memorandum of appropriation. This should include the same contents and signatures of the parties involved, but those signatures will not necessarily be witnessed. This route is easier to arrange but does bring an additional layer of risk if a dispute arises later. For example, a beneficiary might claim not to have provided consent (in a case where their consent to an appropriation is required) and claim the signature is fraudulent. Here, a deed would provide a witness who can attest to that party’s signature of the document.

When does Capital Gains Tax apply during probate?

Capital Gains Tax (CGT) may arise during probate if the PRs sell a chargeable asset that has increased in value since the date that someone died. That increase in value is treated as a gain for CGT purposes.

PRs are collectively entitled to use the same Annual Exempt Amount (AEA) as an individual in the tax year in which the death occurred, and the two tax years following. If the estate incurs gains after that, no AEA is available. The AEA for 2024/25 is £3,000.

What assets are within the scope of Capital Gains Tax during probate?

Most assets are within the realm of CGT. Below are some of the most common CGT-exempt assets:

Private vehicles – while most personal cars are exempt, taxis, racing cars, single seat sports cars, vans/lorries/other commercial vehicles and motorcycles/scooters (including sidecar combinations) do not qualify for this particular exemption. However, they may be exempt as wasting assets.
Personal belongings valued at less than £6,000.
Stocks and shares held within an ISA – the ISA retains its tax-exempt status for up to three years from the date of death.
Betting wins.
Some government gilts/securities.
Property used as a beneficiary’s main residence – this is exempt only where the beneficiaries lived in the estate property as their main residence immediately before and after the deceased’s death, and where those beneficiaries are entitled to at least 75% of the net sale proceeds of the property.

How can a deed of appropriation help with CGT?

When an asset is appropriated to beneficiaries before its sold, the beneficiaries are treated as acquiring all or part of the asset at its value on the date that someone died for CGT purposes. That means that when the asset is then sold, any CGT is assessed against the beneficiaries in accordance with the shares appropriated to them, rather than against the estate.

Estates pay CGT at the higher rate (currently 24%), whereas the rate paid by a beneficiary depends on their individual income. The taxable gain attributable to a beneficiary is added to their taxable income. Any portion of the gain that falls under the basic rate band (£37,700 in 2024/25) is taxed at the lower rate of 18%, with any remaining gain taxed at the higher rate of 24%. If the deceased was an investment fund manager (which of course is a small proportion of the population), gains on carried interest are charged at 28%.

Often a deed of appropriation will include a declaration that the PRs hold the asset being appropriated ‘on a bare trust’ for the beneficiaries. This does not affect the CGT position, but allows the PRs, in their capacity as bare trustees, to keep control over the sale process.

Example

To give a practical example, let’s say that John dies in January 2024. Anne and David are the PRs of the estate and also beneficiaries in equal shares. John’s estate includes a rental property valued at £300,000 at the date of death.

In November 2024, Anne and David accept an offer of £390,000 for the property, meaning there will be a gain of £90,000 (we’ll assume for simplicity that there is no allowable expenditure as provided by s38 Taxation of Chargeable Gains Act 1992). Anne and David have the following taxable income in the 2024/25 tax year, after deduction of their personal allowance and other Income tax reliefs:

Anne - £5,000
David - £25,000

If they proceed to sell the rental property as PRs, then the CGT liability would be as follows:

£90,000 (chargeable gain) - £3,000 (AEA) = £87,000 (taxable gain)
£87,000 (taxable gain) x 24% (higher CGT rate) = £20,880

However, if they instead decided to enter into a deed of appropriation before finalising the sale, such that 1/3 of the property remained in the estate and each of them was also appropriated a 1/3 share, then the CGT liability would instead be as follows:

Estate

£30,000 (chargeable gain) - £3,000 (AEA) = £27,000 (taxable gain)
£27,000 X 24% (higher CGT rate) = £6,480

Anne

£30,000 (share of gain) - £3,000 (AEA) = £27,000
£5,000 (taxable income) + £27,000 (taxable gain) = £32,000
As the above total is below the basic rate band of £37,700, the taxable gain will be wholly taxed at the lower rate of 18%.
£32,000 (taxable gain) x 18% (lower CGT rate) = £5,760

David

£30,000 (share of gain) - £3,000 (AEA) = £27,000
£25,000 (taxable income) + £27,000 (taxable gain) = £52,000
As the above total exceeds the basic rate band of £37,700 by £14,300, £14,300 of the gain will be taxed at 24%, but the remaining £12,700 of the gain will be taxed at the lower rate of 18%.
£12,700 (taxable gain at the lower rate) x 18% (lower CGT rate) = £2,286
£14,300 (taxable gain at the higher rate) x 24% (higher CGT rate) = £3,432

Total CGT liability for all parties = £17,958

So, by using multiple AEAs and the lower rate of CGT that some beneficiaries might pay, significant savings can be made to maximise the estate value for distribution to beneficiaries. PRs also retain control of the sale.

Charities

A deed of appropriation is also an exceptionally useful tool where property is left to a charity. Charities benefit from an exemption to CGT where gains are made on assets appropriated to them. For this reason, charitable beneficiaries will often ask PRs to consider appropriating property to them.

What else do personal representatives need to consider when using deeds of appropriation?

There are three main considerations that PRs should think about before deciding to use powers of appropriation.

Are they at risk of appropriating property that may need to be applied toward estate debts or other claims against the estate? If so, they should take care to make sure that the debts can still be settled, as these debts will take higher priority than the beneficiaries’ entitlement.
Are they exercising their powers in the most tax-efficient manner? In the above example, if there were other estate assets that could have been appropriated to David that did not attract a CGT liability, then it would have been advantageous to appropriate those assets to him. Anne could have been compensated (so as to retain the overall equal division of the estate) with a greater proportion of the property, thus attributing more of the gain to her, as her capacity to pay the lower rate of CGT was not exhausted.
In terms of timing, will they be able to put arrangements in place before the sale of the asset in question is finalised? To use the CGT benefits, the appropriation must take place before the sale. In the case of property, ideally this should be done before the exchange of contracts (which is the trigger point for CGT, rather than actual completion of the sale). With that said, there is some authority in Jerome v. Kelly (Her Majesty's Inspector of Taxes) [2004] UKHL 25 for appropriations made between the exchange of contracts and completion to still be effective for CGT purposes, though I would not encourage relying on this.

What is the deed of appropriation process?

The deed of appropriation process is as follows:

Identify assets and beneficiaries – PRs determine which assets to appropriate and which beneficiaries will receive them. Clear communication with the beneficiaries about their wishes and their personal tax situation will help make the best decisions about what is in the best interests of all parties.
Obtain consent – Even in cases where it is not strictly necessary, it is best practice to seek the consent of all beneficiaries involved. If consent is required on behalf of a minor, their parent or legal guardian can provide this.
Draft the deed – A solicitor typically drafts the deed, recording all relevant information as detailed earlier in the article.
Execute the deed – All parties sign the deed in line with the witnessing requirements already mentioned.
Deal with the assets – The appropriated assets are either transferred to the beneficiary or sold by the PRs (as bare trustees), depending on the terms of the deed.

Summary

A deed of appropriation offers flexibility in estate administration. It enables PRs to balance practicality, beneficiary preferences, and tax efficiency. By understanding CGT liabilities and following due process, PRs can ensure compliance while minimising tax burdens.

Legal advice is strongly recommended to navigate the complexities and comply with fiduciary duties.

About the author

Adam Sym is a Probate Lead at Trustestate. With more than a decade of experience in the private client sector, Adam specialises in the administration of complex estates, trusts and inheritance tax matters.

Find out more

Administration of Estates Act 1925 (Legislation)

Judgments - Jerome (Appellant) v. Kelly (Her Majesty's Inspector of Taxes) (Respondent) (Parliament)

Images

Getty Images

Publication date

11 March 2025

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.