When distributing an estate personal representatives have a large number of powers to assist them. One of these useful administrative powers is the power of appropriation. This article will discuss what this power is, how it can be exercised and why a personal representative might choose to do so.
What is the power of Appropriation?
Personal representatives, being executors and also administrators under intestacy, have the power of appropriation under S41 of the Administration of Estates Act 1925. An express power can be included in the will if required.
Under the power of appropriation the personal representatives can ‘appropriate’ any part of the estate in satisfaction of legacy or share of the Residiuary Estate. For example instead of providing a beneficiary with a cash gift of £50,000, the personal representatives may instead give the beneficiary assets with a total value of £50,000.
Following an appropriation, the beneficiary’s interest is in the appropriated assets, if these increase or decrease in value, the beneficiary gets that benefit or bears that loss.
In order for the personal representatives to appropriate assets, there are some conditions that must be satisfied.
Appropriation under S41 requires consent before the appropriation can occur. The person whose consent is required depends on the gift:
- If the appropriation is for the benefit of a person absolutely and they are beneficially entitled in possession their consent is required.
- If the appropriation is towards an interest passing to trust, including a contingent interest, the consent of either the trustee (not being the personal representative) or the person entitled to the income of the trust is required.
- If the beneficiary is a minor, consent may be given on their behalf by the minor’s parent, guardian or by the court.
There are some exceptions to this rule where the appropriation is an investment authorised by law.
The will may amend this so that consent is not required. The STEP Standard Provisions (Second Edition) at provision 4.15 does include a power of appropriation where consent is not required.
Finally, the appropriation must not prejudicially affect any specific gift.
Value of the Appropriation
Under the S41 power, an appropriation is made at the value of assets at the date of the appropriation, rather than at the deceased’s death. The STEP Special Provisions (second edition) at provision 22 gives the personal representatives the discretion to use the value at the date of death for the appropriation and the personal representatives must take reasonable care in exercising this discretion.
Reasons for an Appropriation
If an asset in the estate has increased in value since death, capital gains tax may be payable on it if the personal representatives sell it. It is therefore quite commonplace for the personal representatives to firstly appropriate an asset, such as a property or portfolio of shares, to the beneficiaries before it is sold so that the beneficiaries’ personal tax allowances can be applied at the sale.