The most common will rearrangements are disclaimers and written variations, usually in the form of a deed of variation, although there is no legal requirement for a variation to be in the form of a deed as long as it is in writing.
A variation of a will or intestacy can be made by any one or more persons whose interest is affected by the variation so long as they are of full age and capacity and absolutely entitled to the interest concerned. It follows that no variation is possible in respect of any assets where minor children, possible future (currently unborn) children or charities are the beneficiaries.
The difference between variations and disclaimers should be understood. In the case of a variation, the beneficiary redirects the dispositions as they choose: ie. name the new beneficiary or decide on the trust provisions. In the case of a disclaimer, the original beneficiary normally has no choice as to the new beneficiary and the disclaimer simply means the particular legacy that is disclaimed would fall into the residue of the estate and be subject to the will provisions in respect of that. It also appears that where the variation could be in respect of any gift or part gift, a disclaimer can only be made in respect of the whole interest.
The requirements for a valid instrument of variation are contained in section 142 IHTA 1984.
These include the following:
- The variation must be executed within two years after the person’s death.
- All beneficiaries affected by the variation must agree and be party to it.
- It must be in writing (not necessarily in the form of a deed).
- If the redirection increases the amount of tax due on death, the personal representatives must be joint in the election.
- The variation must not be made for any consideration in money or money’s worth.
Provided the above conditions are satisfied, the provisions of the deed of variation will be treated, for inheritance tax purposes, as having been made by the deceased. In practice, the way a deed of variation is drafted is to replace the relevant clauses of a will with new clauses containing the new provisions.
The provisions apply to property comprised in a person’s estate immediately before their death, including excluded property but not any settled property in which the deceased had an interest in possession. The provisions also apply whether or not the administration of the estate is complete or the property concerned has been distributed in accordance with the original disposition. When the property is redirected, the relevant value for IHT purposes remains the value at the time of death. This means that, for example, where the deceased’s estate passing to their widow/widower has significantly increased in value from the time of death, a deed of variation can be used to pass the gain element to the next generation free of IHT.
There is equivalent capital gains tax legislation, which provides that an election can be made so that the variation or disclaimer does not constitute a disposal and will be treated as if it had been made by the deceased (section 62 TCGA 1992).
Tony Wickenden is joint managing director of Technical Connection