Over the past couple of weeks, I have been looking at the fundamentals of the deed of variation. Last week, I looked at the taxation aspects, which drive the majority of questions from advisers. However, there are a few other aspects to consider – for example, joint tenancy interests.
HM Revenue & Customs has confirmed it is possible to effect a deed of variation in respect of an asset that was jointly owned (i.e. on a joint tenancy basis, not on a tenancy in common basis) by the deceased with another person and, therefore, passed automatically to the survivor. This is because the legislation (section 142 IHTA 1984) refers to assets passing by “will, intestacy or otherwise”. This is notwithstanding the fact it is not possible to sever a joint tenancy in a will (although it is possible by a simple declaration to sever such a tenancy during lifetime).
In the past, this provision has been useful where no advantage has been taken of the nil-rate band and part of the estate was comprised of assets jointly held with a surviving spouse/civil partner. The surviving spouse/civil partner could vary their inheritance by redirecting one half of such previously jointly owned assets, say, to the children. This is no longer as important following the introduction of the transferable nil-rate band on death from 9 October 2007.
Double death variation
And then there is the so-called “double death variation”. Although it is not possible to make more than one variation in respect of the same assets, it is possible to effect a deed of variation in respect of the wills of both a deceased husband and deceased wife/civil partner, provided it is done within two years of the first death (i.e. with the second spouse/civil partner also dying within that period).
The executors of both spouses/civil partners would normally be party to the deed as well as the beneficiaries although, strictly speaking, only if there is more inheritance tax to pay are the executors of the first spouse/civil partner to die required to join in. Historically, such a variation would have been appropriate where the first spouse/civil partner did not utilise their full nil-rate band on death, yet left assets to the surviving spouse/civil partner. The variation could increase the legacy of the ultimate beneficiary as that coming from the first spouse to die provides maximum tax efficiency, which only became relevant on the death of the second spouse to die. As described previously, the transferable nil-rate band has now effectively overcome this problem.
Pre-owned assets tax
Because someone is giving something up but potentially retaining a benefit we also have to consider the potential application of the pre-owned assets tax.
From 6 April 2005 a POAT income tax charge can apply to certain settlements under which the settlor can benefit. If a trust is created under a deed of variation, say, by the widow of the deceased, and the widow is one of the beneficiaries (as well as being the settlor of the trust for income tax purposes), such a trust would not be a gift with reservation because it is deemed to be made by the deceased for IHT purposes. This means it could potentially be caught by the POAT provisions. However, there is a specific exemption in the legislation for such trusts created under a deed of variation.
Powers of attorney
Of course, when considering any form of estate planning it is hard to ignore the importance of powers of attorney. A question is sometimes asked whether a deed of variation can be executed by an attorney acting under a lasting (or enduring) power of attorney, especially where the donor of the power has lost capacity. This would often arise in cases where there is a possibility of applying for assistance with residential care costs.
The rules are relevant only for tax purposes and the rules for charging for residential care have no connection with IHT whatsoever. Therefore, if a beneficiary under a will redirects a legacy, this may well amount to deliberate deprivation for that purpose.
As for variations by attorneys, given a deed of variation is, in principle, a gift by the beneficiary for all purposes other than tax, one would need to check whether the attorney has in fact authority to make such gifts. Almost certainly, an attorney would have to apply to the Court of Protection for permission to make such a gift and the Court would need to be convinced the gift would not leave the individual concerned short of funds (e.g. with which to pay for their care). Therefore, in practice, it is unlikely such a variation would be possible.
Tony Wickenden is joint managing director at Technical Connection