View more on these topics

Tony Wickenden: Rules of law on deeds of variation

Tony-Wickenden-MM-Peach-700x450.jpg

At the end of my series on deeds of variation I would like to consider some of the relevant case law. The first is Lau v HMRC 2009. The case of Mrs Maynard Lau (the Executrix of Werner Lau Deceased) v HMRC [2009] Spc 0740 (18 March 2009) before the Special Commissioners illustrates the principle that to be effective for inheritance tax purposes the variation must not be made for consideration.

An attempt by a widow and her children to avoid IHT on an inheritance of about £2m failed because they did not understand the operation of UK law. Lau was separated from her German husband in 2001. When he died on 6 October 2004 he left an estate of about £7m. Of this, £665,000 was to be paid, free of tax, to each of his two daughters and his stepson, Mr Harris. The grossed-up value of each gift would have been £1.1m.

After the death the family sought ways of mitigating the tax that would fall on the almost £2m gifted to the three children. The daughters lived in Germany while the mother and stepson lived in Scotland. Correspondence between the lawyers for the daughters and mother resulted in a solution that involved a deed of variation. By the variation all three children would give up their inheritance in favour of their mother in return for £1,000,000 each. The variation was effected on 19 July 2006.

Although the variation was made within two years of the date of father’s death it appears the parties failed to take heed of section 142(3) Inheritance Tax Act 1984 – where a variation is made for “consideration” it has no effect for IHT purposes.

The two daughters accepted they had failed in their attempt to reduce the IHT bill. However, the stepson tried a different approach. He claimed that on 23 March 2005 he had formally renounced his inheritance in an undelivered letter held by the solicitors. Harris had been paid £1m by his mother in October 2005. He stated he entered the deed of variation simply because his name had been included in the deed but it had no effect from his point of view because of the prior renunciation.

The question arose as to whether the renunciation was for consideration. Harris said he renounced the £665,000 because he was financially secure. This was because his mother had promised him £1m in 2001 to help him set up a business.

The Special Commissioners found against the taxpayer for the following reasons:

  1. It was not true Harris was financially secure. The promise made by his mother could not be legally enforced and he was actually in need of funds.
  2. Harris was party to the negotiations to reduce the IHT charge on his mother.
  3. The £1m paid to each of the three children was effectively £665,000 plus the IHT saved.
  4. Harris had not made a renunciation. The undelivered letter did not meet the formal requirements in the legislation – it should have been delivered.

This is simply a case of not taking proper legal advice. The family first failed by effecting a deed of variation for consideration. Harris failed (apart from anything else) because his renunciation was void as his letter had not been delivered within the two-year time limit.

Another case is that of Ashcroft v Barnsdale (2010). In this case the Court agreed to rectify a deed of variation of a will on the grounds it had mistakenly created adverse IHT consequences.

In the Ashcroft case, the deceased’s will gave her farm to her husband and her residue to her children. To reduce IHT, the will was varied by a deed of variation to instead give the farm to the children, utilising agricultural property relief, plus a cash legacy, while the husband received the residue. An error in the deed of variation meant the tax on the cash legacy was payable from the residue and not out of the legacy as intended. This resulted in an IHT liability whereas, if the deed had been drafted correctly, there would have been no IHT.

Because the mistake was in the drafting, the widower executed a deed of rectification. HMRC refused to accept it without a Court order hence the High Court proceedings. The Court agreed to rectify the deed on the grounds it did not embody the true intentions of the family members.

However, the judgement makes clear that “the Court cannot rectify a document merely because it fails to achieve the fiscal objectives of the parties to it … if the parties’ rights will be unaffected and the only effect of the order will be to secure a fiscal benefit for one or more of them”.

The effect of the rectification was that the document continued in effect but as rewritten.

Although the provisions allowing tax-efficient post-death rearrangements are extremely useful, it should generally be recommended wills are regularly reviewed and kept up to date. If a person is uncertain whom they wish to benefit, the more tax-efficient arrangement would be to leave all the property subject to a two-year discretionary trust. The transferable nil-rate band also avoids the need for deeds of variation where the first of a couple to die does not either fully or partially utilise their nil-rate band. So, the deed of variation should be considered a useful estate planning “safety net” but is no substitute for a regularly reviewed will.

Tony Wickenden is joint managing director of Technical Connection 

Recommended

People on the move

The chief executive of Aviva’s UK and Ireland Life business David Barral is to leave at the end of May after 16 years with the firm. Barral’s departure follows shareholder-approved Aviva’s takeover deal of Friends Life. Friends Life chief executive Andy Briggs will become chief executive of the enlarged UK and Ireland life business, subject […]

Chris-Hannant-poses-side-frontal-in-2013.jpg
5

Apfa: Adviser profits up 5% as market stabilises

Advice firms saw an increase in pre-tax profits of 5 per cent last year as the market began to stabilise, according to Apfa’s latest state of the market report. The annual report shows that pre-tax profit for all firms with an FCA primary category ‘financial adviser’ was £931m last year, up from £884m in 2013. […]

HSBC-700x450.jpg
30

FOS rules against HSBC over rejecting mortgage based on age

The Financial Ombudsman Service has upheld a complaint against HSBC for unfairly rejecting a mortgage application on the grounds of age in the first case of its kind. The Sunday Times reports a couple in their forties, who do not wish to be named, were turned down when applying for a joint £250,000 interest-only loan […]

Lisa-Winnard-MM-Peach-300.jpg

Lisa Winnard: Spring-clean your recruitment process

Spring-cleaning may not necessarily be the first job on the to-do list in the new financial year. However, this tradition of “shaking the house” has also been likened to getting one’s affairs in order. As we continue to see a strong demand for financial advisers and a deficit of candidates in the marketplace, a good […]

UK housebuilders remain a value trap – despite post-Brexit falls

By Mark Martin & Holly Cassell, Neptune UK Equities As investors continue to digest the UK electorate’s vote to leave the EU, Neptune’s Mark Martin and Holly Cassell explain why they believe housebuilders remain dangerously overvalued Click here to view full article Important information  Investment risks  Neptune funds may have a high historic volatility rating and […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com