Deed of Variation - Anti Avoidance

Would welcome people’s opinion on the following:

Deceased estate leaves a number of cash gifts to friends, a cash gift to spouse (second wife) and the residue to the Son. IFA have told the estate (Son and Spouse) to use a DOV to renounce the Sons residue in favour of the Spouse to extinguish IHT liability, and calculated the immediate cash gift to be made from the Spouse to the Son.

My feeling is that this would meet the conditions of s142(3) Subsection (1);

“above shall not apply to a variation or disclaimer made for any consideration in money or money’s worth other than consideration consisting of the making, in respect of another of the dispositions, of a variation or disclaimer to which that subsection applies. The agreement of disclaiming for a future gift is moneys worth”.

I also note the following case:

What is the general consensus? is this well accepted tax planning? or does this go directly against what DOV legislation was intended for?

Claire Spinks
British Taxpayers

HMRC are likely to query this. See the IHT manual at IHTM35093.

Diana Smart
Gordons LLP

You state “… and calculated the immediate cash gift to be made from the Spouse to the Son”.

I’m not sure what is meant here.

The amount of IHT on the deceased’s estate will be reduced under the DoV. The issue as to the validity of a DoV under s 142 depends upon there being no intention on the part of the spouse to make lifetime gifts to those making the DoV in exchange for the DoV being made which could be considered as consideration. It doesn’t appear necessary to constitute “consideration” for the spouse to have entered into some binding obligation ( Lau v HMRC [2009]). The Lau case is useful indicating HMRC will not simply accept the validity of DoV in particular where the DoV results in a re-direction to the surviving spouse and a reduction in IHT arises; however, it does seem to be a case decided on its own particular facts.

In Vaughan-Jones v Vaughan- Jones [2015] a case on rectification of a DoV the following statement was made by counsel (although the Judge made no ruing as to the application or not of s 142 re “consideration”) as top the need for some sort of binding obligation:

“Finally, Mr Oughton addressed me on the additional point raised by HMRC as to the potential application of section 142(3) of the Inheritance Tax Act. Mr Oughton has submitted that the case cited of Lau v Revenue & Customs Commissioners is a decision on its own particular facts, which establishes no general proposition of law beyond the fact that the onus of proof on the issue of consideration rests with the taxpayer. Mr Oughton has taken me in detail through the decision, citing paragraphs 21, 35 to 36, and 46 to 47. He submits that the expression ““any consideration in money or money’'s worth”” is a technical expression which requires a bargain which is sufficiently definite. He submits that it does not include a generalised intention to give sums of an indefinite amount at an indefinite time in the future, which gives rise to no legally enforceable obligation, and where the widow could, without adverse consequences to herself, change her mind at any time”. ( my italics ).

As Lau and Vaughan-Jones indicate solicitor’s attendance notes and other notes of discussions are of particular interest to HMRC and may prove fatal.

Malcolm Finney

I such an arrangement, HMRC will often ask if there is any intention that the widow makes any gifts to the son. If answered in the positive, then, yes, it will deny the availability of s.142 IHTA relief on the basis of s.142(3).

My view is that such a proposal is inappropriate and the promotion of a tax avoidance scheme.

If the son had given up his interest and, at some later date, the widow had considered making a gift to him, the 2 events would not be connected, and so no tax avoidance questions should necessarily arise. However, when the advice is make the variation and get your money back, that is abusive (and ineffective) tax planning. Yes, it works if you don’t get caught, but is that a policy to be adopted by any professional with a reputation to be proud of?

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

There must not be any prior arrangement for the spouse to make a gift to the son. The prior arrangement need not be a binding commitment by the spouse but HMRC will likely ask whether any such gift was even contemplated by the spouse at the time of the DoV.

I expect it would be preferable to use the DoV to create a flexible life interest trust with the son being one of the trustees. Further down the line the trustees may consider exercising their overriding powers of appointment.

Tobias Gleed-Owen
Hewitsons LLP

Completely agree Paul. This had been raised by an existing client having it had suggested to them by a solicitor and an adviser at SJP. I was not comfortable with the idea and thought that s142(3) had been created for this purpose, however as it had been suggested by two (unconnected) professionals I needed to check i wasn’t being overly cautious.

Claire Spinks
British Taxpayers

Thank you for all of your input everyone.

Malcolm, what I had meant was that, SJP had called that if the DOV had been put in place, the amount that the spouse would then need to gift to the Son - so that she had not effectively benefitted. I think they were trying to demonstrate the tax saving that their idea would generate.

Tobias, I note that this is also mentioned in IHTM35093. I think given the reasoning behind doing this, we wont suggest it. Its clear that, which ever route is taken, they are trying to minimise (could say avoid) taxes.

Claire Spinks
British Taxpayers

I would agree with the consensus that s142 relief should be denied on the basis of s142(3). This is a clear example of abuse of a provision in a way that is not intended to be effective, confirmed by the inclusion in legislation of subsection (3); and, sadly, another example of advisors seeking to exploit the rules without fully understanding them.

James Heathcote CTA
Lancaster Knox

This issue highlights a common modern dilemma in tax jurisprudence (if any such actually exist, which is not admitted). Its interpretation often now demands an excursion into metaphysics. There is too much involvement of intention, purpose and motive and the flight from the golden literal rule to the purposive construction of tax law.

While the state of a person’s mind is a question of fact akin to the state of their digestion, it falls to be evinced by reference to their own statements, actions and conduct. It is tough to bear the burden of proof that, for example, no consideration was intended. The legislation of course does not demand that intent, merely that it was furnished as a matter of law; but advisers nowadays must factor in pragmatically the approach of HMRC, and their unilaterally arrogated function as the Thought Police, as a key canon of statutory interpretation.

This is exacerbated by HMG’s facilitating vague, poorly thought out, tax legislation sometimes specifically trailed in advance as potentially disastrous by people like me with 50 years’ bitter experience of advising hapless taxpayers; and often (disgracefully) requiring litigation at taxpayers’ expense in order to determine its meaning. As a lifelong conspiracy theorist, I suspect this to be deliberate Government policy.

My main purpose in this post (especially for non-tax specialists) is to enjoin all those who would essay upon advice about, or active formulation of, action which relies on critically clear operation of tax statutes to be aware that the attitude of HMRC (even if plainly wrong or constitutionally quite improper) is a vital ingredient of your evaluation. Also, every communication of theirs, however apparently banal, is potentially and sometimes actually a step in prospective litigation, for which they have an insatiable appetite and a blank cheque.

Whatever the law seems to say, a clever tax plan is unlikely to survive the impertinent HMRC sniff test unless your client is prepared to accept the cost (and often, much worse, the publicity and hassle) of visiting the Supreme Court if need be. Some of my clients love this challenge but others think it is not worth even a trip to the First Tier Tribunal, only to win but face an immediate appeal.

Do not be misled by the internal review machinery or the published Litigation and Settlement Strategy (LSS): HMRC virtually never acknowledge that a policy position they have internally adopted is wrong until one or more judges so determine without possibility of further appeal. So in practical terms where that adopted position is published e.g in a Manual or definitively advanced in correspondence they will defend it beyond rationality, unlike most commercial litigants represented by rational lawyers.

The LSS is compulsory reading (know your enemy) though largely misinformation. Its most blatantly untrue statement is: “HMRC does not have a monopoly on understanding how tax law applies to a particular set of facts”. Self-evidently, and quotidianally in practice, the facts demonstrate that the megalomaniacs clearly do believe that.

Jack Harper

Another possibility would be to give the widow a fixed term interest in the income, say for 2 or 3 years, with the son taking the capital after that period has expired. This should ensure that no IHT is payable on the estate, and there is nothing hidden from HMRC.
It does, of course, have other tax implications and effects when the ‘life’ interest ends.
John Randel
Lee Bolton Monier-Williams

I would agree with the general views that this is “tax avoidance” and wouldn’t advise a client to do it primarily for the professional reasons outlined by Paul Saunders above.

Without wishing to digress too much, I had an instance recently where a client held a property pregnant with a capital gain. The advice from the Tax Advisor was to create a Discretionary Trust and transfer the property into the Trust with a hold over relief claim. The intention then being that the Trustees would after a short period appoint the property out of the trust to teh intended beneficiary. The advice was confirmed in a formal letter. I pointed out the potential tax avoidance issue to the derision of both client and Tax advisor. I lost a client as a result. My frustration with these cases is that often there is no automatic trigger for the person entering into these “arrangements” to report to HMRC. I am not sure if this Trust actually proceeded but doubt anything was ever reported to HMRC.

Justin Wallace
Brewer Harding & Rowe

If the Government introduces a tax on oranges and an individual deliberately buys apples:

1 Is this Orange Tax Avoidance;

2 Can HMRC impose Orange Tax because “it’s all just fruit”

3 Can HMG legislate retrospectively to define “oranges” to include apples?

Jack Harper