I would welcome members views on the following scenario:
Mr A dies intestate and under the intestacy rules the entire estate passes to his father Mr B. Mr B prepares a homemade letter advising he does not wish to inherit and indicates he would like to redirect estate to his daughter. The letter is signed and witnessed but does not contain the usual election for IHT and CGT purposes. The intention was the letter be a short term measure prior to executing a formal Deed of Variation. Sadly Mr B dies before entering into a formal Deed of Variation.
Under terms of Mr B’s Will estate is distributed 50% to daughter and 50% equally among two granddaughters on attaining the age of 21. One grandchild is a minor aged 17 the other aged 20 so neither currently have a vested interest.
My questions therefore are;
Would HMRC accept the homemade letter as an effective variation for IHT purposes despite an election to this effect not being made when this was clearly the intention of Mr B?
If the letter is not effective should an application be made to the Court to vary the Will based on the evidence contained within the letter signed by Mr B?
IHT is payable on the estate of both Mr A and Mr B.
The legislation states that for a variation to be effective it has to contain a statement that all parties intend s142 to apply to the variation. I cannot see HMRC having any leeway on that.
However, does the letter satisfy the conditions for a disclaimer? If it does a statement to apply s142 is not required. If disclaimed presumably the estate would pass to the daughter under the intestacy rules
A variation does not need to be by deed. A letter will be effective if (1) it is signed by Mr B; and (2) clearly identifies the part(s) of the estate that he is varying and says who is to benefit from the variation – as to whether (2) is satisfied depends on the wording of the letter. He has signed the letter as a deed in any event. On the facts I’d want to be certain that Mr B intended the letter to have legal effect as the reference to it being a ‘short-term measure’ raises some doubt and it could be argued that he considered it to be no more than a statement of his intention to enter into a more formal deed of variation in due course. However, if he intended the letter to give legal effect to the gift and considered the deed he intended to sign as a more formal mode of documenting what has already happened, then this is unlikely to be an issue.
For the variation to take effect for IHT and/or CGT purpose it must contain the relevant statements - the letter does not and that is fatal. HMRC will not accept that the letter takes effect for IHT purpose.
You could consider whether there is sufficient evidence to justify an application for the rectification of the letter so as to include the required clauses for reading back. As to the evidence required you may wish to take a look at Vaughan-Jones v Vaughan-Jones [2015] EWHC 1086 (Ch) which, although not on all fours, is a helpful illustration of the court’s approach to rectifying a deed of variation which fails to correctly give effect to the beneficiary’s intention as a result of an error in drafting. The question for you is whether Mr B had the intention to effect a disposition which would enjoy the special tax treatment which reading back would achieve. There is nothing said in the post that would allow one to comment further.
An application to the court to vary the Will in accordance with the letter is a non-starter.
Thank you for your reply Stuart. The aim of the letter was to mitigate the IHT liability in respect of Mr B’s estate. I will make further enquiries in relation to an application to the court to rectify the deed of variation as there is strong evidence Mr B intended to take advantage of the special tax treatment.
In Vaughan-Jones & Anor v Vaughan-Jones & Ors [2015] EWHC 1086 (Ch) (05 March 2015), HHJ Hodge QC, sitting as a High Court Judge, rectified an ineffective deed of variation which did not contain the required IHT election.
Judge Hodge held that there was sufficient evidence of the parties’ intention as regards IHT to grant rectification, but he refused permission to rectify the deed so as also to include the CGT writing back provision because there no evidence that it was in the parties’ minds at the time the deed was entered into.
The case is not on all fours with this scenario, but it might be a useful authority if you do decide to seek rectification. The prospect of success here will depend largely on the quality of the evidence as to intention, I suspect.
A disclaimer does not need to include declarations under either s.142 IHTA 1984, nor s.62(6) TCGA 1992 to be effective for tax purposes.
A disclaimer may be made in many form, formal or informal, and a simple letter will suffice, although may be more likely open to challenge by persons who believe they have been disadvantaged by it (and will usually allege the person making the disclaimer did not properly understand its effect).
The issue is whether the letter is a valid disclaimer.
Generally, if a purported disclaimer indicates to whom the “disclaimed “ benefit should pass this undermines the disclaimer, as the disclaiming beneficiary is seeking to redirect their entitlement (which implies a degree of acceptance).
However, if the reference to the person(s) benefitting reflects the legal effect of a disclaimer, then is the person making the disclaimer merely acknowledging the effect of the disclaimer?
If the letter existed on its own, I would be inclined to the view that provided the daughter was the only person who would be entitled as a result of B’s disclaimer, it may well be treated as valid. However, if it was only intended to be a short term measure, pending execution of a deed of variation, it cannot have been considered effective at the time, otherwise there would have been no need for the variation (as there would have been nothing for it to “vary”).
In the circumstances, I doubt the letter has any legal effect.
Once the remaining grandchild attains age 18, and assuming that if the grandchildren’s share fails it accrues to the daughter’s share, consideration might be given to varying the disposition of A’s estate to redirect B’s entitlement to his own beneficiaries subject to the equivalent terms of B’s will.
Whilst I do not disagree with what Paul Saunders has to say about disclaimers in his reply, I do not share his view that the letter cannot amount to a variation and might only amount to a disclaimer. I do appreciate that on the facts a disclaimer might be all that Mr B needed to effect in order to get the estate to his daughter under the intestacy rules.
If Mr B intended the letter to redirect his entitlement to his daughter and clearly identified what he was redirecting – then I cannot see why it would not amount to a variation. If it is a variation, it is necessarily not a disclaimer (even if that might get around the issue of reading back).
Whilst we have sought to construe the content of the original posting, the real test will be the wording of the letter, which might be more readily construed one way or the other.
As a “homemade letter”, Mr B may not have been advised on its content. In the absence of evidence that the omission of declarations under s.142 IHTA 1984 and/or s.62(6) TCGA 1992 was a mistake/error, the court’s decision in Vaughan-Jones v. Vaughan Jones [2015] (on the CGT point), to my mind, suggests the document would be unlikely to be rectified to include such declarations.
I think the eventual outcome will depend upon the nature of the relationship between Mr B’s daughter and the 2 grandchildren. Rather than potentially incurring significant legal costs to resolve the issue, if they can agree on the allocation of Mr A’s estate between themselves, once the youngest grandchild attains their majority it might be possible to enter into a simple deed of variation to bypass Mr B’s estate for IHT purposes.