The Deceased’s children are the beneficiaries of their late father’s Will.
They wish to save IHT by varying the Will under S142 IHTA to give their step-mother an IPDI and claiming spouse exemption.
However, they only want their step-mother to receive income for the shortest possible period (2 years from their father’s death).
The question is can they limit the income period even further by only giving their step-mother income from the date of the deed of variation? Will this count as an IPDI, or must their step-mother receive income from the date of death?
They only need to give her the income from the date of the deed of variation. In fact, it is difficult to do otherwise, since the deed is not retrospective for income tax purposes, it is only deemed to be retrospective for IHT purposes (if the relevant conditions are met).
If the period of her interest is too short, or if her income entitlement is otherwise insubstantial, there might be an argument that there has, in fact, been no variation of entitlements. At least six months is probably best, and make sure she does in fact derive some meaningful income from the fund - you may need to consider dis-applying the rule against apportionment in your deed if income is received irregularly.
Depending upon the step-mother’s life expectancy, this could be very expensive arrangement for her estate as it could swallow a substantial part (if not the whole) of her own nil rate band.
Whilst the right under a deed of variation is effective from the date of the deed (applying Waddington v. O’Callaghan, 1931) if it is clear from the face of the deed that the widow’s entitlement is postponed to sometime after the date of death, I suspect HMRC would question the application for spouse relief.
If the proposal is proceeded with, I would suggest the life interest terminate a few days after the second anniversary of death, to ensure that no point can be taken on the application of s.142(4) IHTA 1984.
A very small point: It would be prudent to have separate Terms of Engagement and a separate file with the donors as clients in their personal capacity for the DOV work. The invoice should be addressed to the donors in their personal capacity and they should pay the costs from their own resources and be able to demonstrate this by disclosure of bank statements etc. The costs should not come out of the estate or be paid by the PRs.
Unless this is done it will be open to HMRC to argue that there is consideration and that the DOV therefore breaches the requirements of IHTA 1984 s142 so that the whole scheme fails. Ultimately, in search of consideration, HMRC may seek disclosure of the your files.
Also it would be prudent to check that there is no tacit agreement or understanding between the donors and the step mother that might possibly be interpreted as consideration. That would also be fatal to the scheme.