Using a Deed of Variation to dodge estate tax

[scrumpyjack]

This is what the HMRC internal manual says on this:
https://www.gov.uk/hmrc-internal-manual ... d%20income.

Tax implications
A beneficiary normally executes a deed within two years of the death. This means that changes attributable to the deceased can be beneficial for capital gains tax, and inheritance tax purposes. But with effect from 1 August 2002 the changes will only be effective from the date of death (TCGA92/S62(6) and IHTA84/S142) if the deed contains a statement of intent that it is to take effect for tax purposes. Deeds of variation may be effective for capital gains tax and inheritance tax but they do not change either the general law position or the income tax position. There is no equivalent legislation to make these deeds work retrospectively for income tax purposes. For the purposes of Chapter 6, Part 5 ITTOIA the deed may have the effect of changing the identity of the person who will be deemed to have received income.
Settlor
The settlor of a trust created by a deed is not the deceased, unless it’s a disclaimer (TSEM1840). It is the person who was entitled to the gift that has now gone into trust. The gift can be capital or income or both. The case of Marshall v Kerr (67 TC 56) is relevant. There may be more than one settlor.

[hiriskpaul]

I was right about this being a can of worms!

This link sets out the situation well and appears to answer my questions:

https://uk.practicallaw.thomsonreuters. ... &comp=pluk

In my case nothing has been paid out to beneficiaries and all interests are residuary interests (fortunately there are no specific legacies (well there is, but it failed!)). In this case the taxation of the rental income will (usually) fall on the successor beneficiary (beneficiary B). However, it does look as though the beneficiary wanting to redirect his share of the residuary estate to his wife cannot escape tax due to anti-avoidance provisions that apply to variations. It is as genou succinctly stated above: "In this case, where B is the spouse of A, the effect of A being the settlor of a trust in favour of a spouse is that the income remains taxable on A."

So it would appear that if anyone wants to do a DoV, they need to tell me about it so that:

1) I know who to pay
2) I know who to give the R185(Estate Income) forms to

If redirecting to adult children, the R185s go to the children. If redirecting to a spouse or minor children, the R185 goes to the original beneficiary.

I would be pleased if someone would verify my understanding before I tell this particular beneficiary the bad news!

[hiriskpaul]

Thanks Scrumpjack. The only Deed of variation I have been exposed to was for my late wife, which involved a fairly extensive rewriting of her Will which was very old and out of date when she died. Her affairs were rather complicated and for all sorts of reasons I preferred to got our lawyer, who was an Executor with me, to sort it out. They drew up the DoV, the original beneficiary signed it (there was only one) and off we went with the new Will. I would be interested to know how these DoVs are actually intended to work, who can initiate them and if anyone ought to arbitrate if necessary.

And on the case the subject of this thread, can the beneficiary named in the Will instruct a lawyer to draw up the Deed of Variation and simply hand it to the Executor? It seems to be causing some hassle for the Executor who seems not to be quite clear who has responsibility for what?

All this quite apart from the technical issue of tax for income arising.

Dod

Something doesn't sound right about this. A Deed of Variation can only be used to redirect legacies, not rewrite wills. Other than DoVs, changes after death require rectification, which can be a very expensive process and needs to go to court. In the estate I am dealing with there is an inconsistency between the letter of wishes and the will, essentially some sloppy work was done by the solicitor who drafted the will. Legal advice I have received on this puts the cost of rectification somewhere between £10k and £20k and isn't even guaranteed to succeed. Beneficiaries have unanimously agreed that they do not want to go ahead with rectification.

[Dod101]

I cannot comment on hirskpaul's remarks; only on what worked for my late Wife's Will. I was a beneficiary only to the extent that I got my share of the family property back into my hands. Otherwise I had no interest in what happened to the assets.

Dod