In this year's Budget, it was made clear that where a person uses a deed of variation to give up an interest in an asset under a will but continues to enjoy a benefit from what has been given up, this will not trigger the proposed income tax charge under the pre-owned assets rule.
That the tax penalties on pre-owned assets will not be applied is particularly gratifying in light of the fact that the charge is an income tax charge and, for general income tax and capital gains tax purposes, the settlor is treated as the person giving up his or her interest. So .RESULT!!
While we are on the subject of deeds of variation, it is worth reminding ourselves of the fundamentals. While it is always recommended that each individual should leave a valid will, there could be various reasons why the beneficiaries or trustees of a will want to rearrange or change the disposition of property comprised in an estate on death, whether directed by a will or on intestacy. The main reasons to make rearrangements are as follows:
To redirect benefits from one beneficiary to another.
To compromise claims under the Inheritance (Provision for Family and Dependants) Act 1975. These are situations where certain individuals may be able to claim relief through the courts even though they were not provided for under a will. If all persons affected can agree how much should be provided for potential claimants, it would be cheaper and easier to redirect the benefits by a variation than through the courts.
To alter the powers of executors, administrators and trustees. This is particularly important where it is intended to widen the administrative provisions applicable to trusts and particularly important on intestacy where, by definition, statutory provisions apply. It is especially relevant where it is intended to avoid the restrictive provisions of the Trustee Act 1925 in respect of the payment of income or capital.
This can only be done by a deed of variation where all the beneficiaries are adult and sui juris (of sound mind). If these conditions cannot be satisfied, a variation would only be possible with the court's consent under the Variation of Trusts Act 1958.
To disclaim a benefit.
To alter beneficial interests, for example, to enlarge a life interest to an absolute interest where there is agreement by those entitled to capital in the remainder.
To help with tax planning. This might include the following situations:
– To make gifts to chargeable beneficiaries (that is, other than the spouse), particularly children or grandchildren, within the deceased's nil-rate band where it has not been fully used by the deceased.
– To provide the surviving spouse with extra funds to enable him or her to make potentially-exempt transfers during his or her lifetime.
– To skip a generation by redirecting gifts to grandchildren.
– Where spouses die within two years of each other, to redirect benefits in such a way as to minimise the overall inheritance tax liability.
– To redirect legacies of agricultural or business property qualifying for full relief so that these are generally gifted to chargeable beneficiaries rather than to a spouse so as to avoid wasting the relief.
The most common rearrangements are disclaimers and written variations. These are 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, currently unborn beneficiaries or charities are the beneficiaries.
The difference between a variation and a disclaimer should be understood. In the case of a variation, the beneficiary redirects the dispositions as he chooses by naming the new beneficiary or changing 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 that the particular legacy which is disclaimed would fall into the residue of the estate and be subject to the will provisions in respect of the residue. It also appears that where the variation could be in respect of any gift or part of gift, a disclaimer can only be made in respect of a whole interest.
Next week, I will look in depth at the case of Cook and another (as executors of Watkins deceased) versus IRC, heard by a special commissioner, which addressed the issue of whether it is possible to disclaim an inheritance by conduct rather than in writing.