Tax avoidance again. This time, “poor” Ed Miliband. The Daily Mail headline read: “Red Ed the tax avoider”. But was he?
The row centres on a deed of variation executed following the death of his father in 1994.
Back then, the transferable nil-rate band had not been invented. We would need to wait until 2007 for that. Miliband’s father, it seems, left pretty much everything to his wife.
The deceased’s own nil-rate band would, therefore, have been wasted, so it was decided that Ed and his brother David should have a 40 per cent share of a property worth £300,000. The nil-rate band at the time was £150,000. So this was the “avoidance” was it? A process specifically contemplated and permitted by the inheritance tax legislation? My point is not to support or defend the Milibands but to express my concern over the impact these headlines are likely to have on advisers’ clients.
Last week I wrote about the impact that headlines and stories on offshore accounts might have on appetite for tax planning (legitimate or otherwise) that involves anything offshore. The same may well be true about deeds of variation – for Daily Mail readers at least.
Now let’s not get carried away with the wonder of deeds of variation. They are a sometimes-useful safety net. However, most of you, I am sure, would agree that it is far better to review and update your will regularly to be sure it reflects your wishes and incorporates legitimate, acceptable and effective planning.
Naming and shaming and adverse publicity may well have caused the bottom to drop out of the market for aggressive or “edgy” tax avoidance schemes. But publicity of the sort we have witnessed recently may also lead people to shun or feel nervous about even the most acceptable of tax planning strategies.
Advisers, therefore, have a job to do with clients to reassure them about what does and does not represent acceptable tax planning.
The deed of variation may well have captured clients’ attention, which could lead to questions about it. What follows is a summary of the rules surrounding the deed of variation process.
I repeat it should be seen as a safety net, not as a substitute for a regularly reviewed will. However, while every person should make a will, there could be various reasons why beneficiaries or trustees of a will would want to rearrange or change the disposition of property in an estate on death, whether directed by a will or on intestacy.
The main reasons to make a post-death rearrangement are these:
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 people may be able to claim relief through the courts even though they were not provided for under the will. If all those affected can agree how much should be provided for potential claimants it would be much 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 if the intention is to widen the administrative provisions applicable to trusts, and particularly important on intestacy where, by definition, the statutory provisions apply. This is especially relevant if it is intended to avoid the restrictive provisions of the Trustee Act 1925 on the payment of income or capital. This can only be done by a deed of variation when all the beneficiaries are adult and of sound mind. If these conditions cannot be satisfied, a variation would only be possible with a 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 those entitled to capital in the remainder agree.
To help with tax planning. This includes the following situations:
1) To make gifts to “chargeable” beneficiaries (that is, other than the spouse or civil partner), particularly children or grandchildren, within the deceased’s nil-rate band where the nil-rate band has not been fully used by the deceased – although this is, of course, no longer so important since the introduction of the transferable nil-rate band on death for spouses or civil partners from 9 October 2007.
2) To provide the surviving spouse/civil partner with extra funds to enable them to make potentially exempt transfers during their lifetime.
3) To skip a generation , that is, to redirect gifts to grandchildren.
4) Where spouses/civil partners die within two years of each other, to redirect benefits in a way that minimises the overall IHT liability.
5) To redirect legacies of agricultural or business property that qualify for full relief so that these are generally gifted to chargeable beneficiaries rather than to a spouse or civil partner (to avoid wasting the relief).
6) To redirect property that has grown significantly in value since the date of death.
7) To redirect “excluded” property into an appropriate trust.
Tony Wickenden is joint managing director of Technical Connection