Using a Deed of Variation to dodge estate tax

[hiriskpaul]

On an estate for which I am an executor, one of the beneficiaries has twigged that estate tax on rental income, as declared on the R185(Estate Income) form, is refundable for non-taxpayers. He has now had the idea of using a Deed of Variation so that I redirect his share of the residual estate to his wife, who is a non-taxpayer. I know this is none of my business as I cannot have knowledge of his wife's income, but is using a Deed of Variation in this way legal? Passing to offspring I can understand, but to his wife?

[scrumpyjack]

Yes I can't see any reason why it would be a problem. AFAIAA the only restrictions on DOVs are that they must be done within 2 years of death and complications may arise where the DOV affects the IHT payable, which this would not.

[genou]

A DoV is not effective retrospectively for income tax purposes, so you'll have to careful to whom and in what amount you issue R185s.

[Lootman]

A DoV is not effective retrospectively for income tax purposes, so you'll have to careful to whom and in what amount you issue R185s.

Define "retrospective". Presumably a DofV can be made retrospective to the date of death, since that is the date the will becomes effective and it is the will that the DofV changes.

But if the asset has already been distributed then maybe only retrospective to the date of the distribution?

Obviously it cannot be made retrospective to before the deceased died!

[chas49]

A DoV is not effective retrospectively for income tax purposes, so you'll have to careful to whom and in what amount you issue R185s.

Define "retrospective". Presumably a DofV can be made retrospective to the date of death, since that is the date the will becomes effective and it is the will that the DofV changes.

But if the asset has already been distributed then maybe only retrospective to the date of the distribution?

Obviously it cannot be made retrospective to before the deceased died!

The significant point in genou's comment is that a DoV is not effective for income tax purposes - it's not the retrospectiveness that's at issue here - there's no provision to avoid income tax by using a DoV (https://www.thepfs.org/news-index/artic ... tion/82865)

[Lootman]

A DoV is not effective retrospectively for income tax purposes, so you'll have to careful to whom and in what amount you issue R185s.

Define "retrospective". Presumably a DofV can be made retrospective to the date of death, since that is the date the will becomes effective and it is the will that the DofV changes.

But if the asset has already been distributed then maybe only retrospective to the date of the distribution?

Obviously it cannot be made retrospective to before the deceased died!

The significant point in genou's comment is that a DoV is not effective for income tax purposes - it's not the retrospectiveness that's at issue here - there's no provision to avoid income tax by using a DoV (https://www.thepfs.org/news-index/artic ... tion/82865)

Presumably there is an income tax saving AFTER the DofV becomes effective and the asset is distributed. I took genou to be referring only to the rental income paid (presumably to the Executor pending probate) after death but prior to the DofV, which cannot be backdated to redirect that income to the non-taxpayer beneficiary.

So the sooner after death the DofV and redirected distribution happens, the more the income tax saving, no?

[scrumpyjack]

But income of the estate is taxable on the residuary beneficiaries (after taking account of tax paid by the executor and reported to the beneficiary on R185) only when PAID, not based on the tax year when it arose. So I don't know how that is affected by the DOV point about DOVs not affecting income tax?

If after 2 years of administering the estate, the executor distributes the income to residual beneficiary B, who became entitled to it after 6 months from death following the DOV prepared by original beneficiary A, does that mean it is all B's income?

[hiriskpaul]

But income of the estate is taxable on the residuary beneficiaries (after taking account of tax paid by the executor and reported to the beneficiary on R185) only when PAID, not based on the tax year when it arose. So I don't know how that is affected by the DOV point about DOVs not affecting income tax?

If after 2 years of administering the estate, the executor distributes the income to residual beneficiary B, who became entitled to it after 6 months from death following the DOV prepared by original beneficiary A, does that mean it is all B's income?

A critical question in the case I am asking about. It is coming up to 2 years, so 2 years of income to distribute and nothing distributed so far. If A passes his legacy to B via DoV, is the income also redirected to B? who gets the R185? A or B?

Seems like another can of worms opening up in front of my eyes.

[hiriskpaul]

Ok , I think I may understand genou's point. The estate income up to the date of the DoV is assessable by party A an A would get an R185 for that income. From the date of the DoV onwards, income is assessable on party B and B gets an R185 for that period. Does that sound right?

If so the beneficiary who had the bright idea of redirecting his legacy to his wife via a DoV to claw back paid estate income tax is 2 years too late.

[scrumpyjack]

Moderator Message:
off topic post deleted by a moderator - quote removed (chas49)

[redacted by moderator] it isn't up to the executor. He is not a signatory of the DOV nor has any say in it. The only parties with any say in this are any beneficiaries whose legacies are involved.

Unfortunately hassle and admin, unpaid for and usually without thanks, are the lot of the executor!

The question of whether the executor legally has to give the income up to the point of the DOV, and issue a separate R185, is still not resolved to my mind. The DOV is stated not to affect income tax, but the taxable event for income tax purposes is the payment of the estate income, not when it accrues, so it is arguable that the income and R185 simply go to the amended beneficiary.

[Dod101]

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

[genou]

If A passes his legacy to B via DoV, is the income also redirected to B? who gets the R185? A or B?

Seems like another can of worms opening up in front of my eyes.

I hadn't really thought that hard about my original comment. I think the executor issues the R185 to B. It is then up to A and B to sort out the correct taxation of the income.

For income tax purposes A has, by the DoV, created a settlement in favour of B, and A has to deal with unwinding the impact of that. 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.

At which point, A may decide that a DoV is a damn sight less interesting. Because of the marriage relationship, the prospective / retrospective issue is moot.

[Lootman]

The question of whether the executor legally has to give the income up to the point of the DOV, and issue a separate R185, is still not resolved to my mind. The DOV is stated not to affect income tax, but the taxable event for income tax purposes is the payment of the estate income, not when it accrues, so it is arguable that the income and R185 simply go to the amended beneficiary.

Or if as the Executor I had already paid out the income to A then the R185 form in that amount would have to name A as well, since I cannot un-pay that income. The form surely states who actually got the income and not who should have got it. Luckily in this case it sounds like the Executor has not yet done that even though nearly 2 years have passed.

[PinkDalek]

...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?

Another of Hiriskpaul’s recent topics had answers on this front***. From memory A & B could deal with a DoV on their own (with or without Solicitor input) such that the Executor(s) need know nothing of it. The Executor could then issue the R185(Estate Income) to B as outlined in Genou’s post that follows yours.

*** I haven’t looked for that particular topic.

[PinkDalek]

The Executor could then issue the R185(Estate Income) to B as outlined in Genou’s post that follows yours,

Correction for B read A (the original beneficiary)!

[scrumpyjack]

I found this on the web

"Income tax and deeds of variation.
There are no specific income tax provisions equal to the Inheritance Tax and Capital Gains Tax provisions. This means that income received by the original beneficiary before the deed of variation will be taxed as income of the original beneficiary even if the entire income received since the date of death is given up."

This suggests, as I had earlier said, that as income tax arises based on the date of distribution to the beneficiary, not on the date the income arises, as long as no distribution has been made to the original beneficiary, the income will properly be that of beneficiary B.

[genou]

I found this on the web

This suggests, as I had earlier said, that as income tax arises based on the date of distribution to the beneficiary, not on the date the income arises, as long as no distribution has been made to the original beneficiary, the income will properly be that of beneficiary B.

I agree with you in the general case, but where the transfer of the income is caught by the settlements legislation, as it is here, the income will remain taxable on A, and the DoV will not achieve its stated purpose.

[csearle]

Moderator Message:
Please take care when posting not to post anything that could be interpreted as encouraging fraudulent dealings. Thanks - Chris

[GoSeigen]

I found this on the web

"Income tax and deeds of variation.
There are no specific income tax provisions equal to the Inheritance Tax and Capital Gains Tax provisions. This means that income received by the original beneficiary before the deed of variation will be taxed as income of the original beneficiary even if the entire income received since the date of death is given up."

This suggests, as I had earlier said, that as income tax arises based on the date of distribution to the beneficiary, not on the date the income arises, as long as no distribution has been made to the original beneficiary, the income will properly be that of beneficiary B.

In my reading it means exactly the opposite.

GS

[genou]

I think Genou was saying that trust law trumped that in that the original beneficiary was entitled to the income on an accrual basis up to the point that the DOV was signed even though the distribution of that income was made after the date of the DOV.
.

In this case the settlements legislation means that all the income, at whatever time it arises, remains taxable on A whether or not there is a DoV.