A dies leaving all of their estate to spouse/partner B. If B then varies their Will to retrospectively sever the joint tenancy and create a Trust of A’s share in the property, does this still fall within the deprivation of capital rules (assuming it can be shown that it is reasonably foreseeable that B will need care)?
Justin Wallace
Brewer Harding & Rowe
Yes, B cannot create a settlement of A’s former interest without themselves owning it.
Paul Saunders
I agree, it can read back for IHT and CGT, but not deprivation of capital. However, if B cannot reasonably foresee the need for care then it would be the same as B creating a lifetime trust, in which case why not put all of her interest in trust?
Iain Cameron
Star Legal
I agree with what Paul and Iain say, but is there any actual authority to back this up?
I am trying to argue this point at the moment
Justin Wallace
Brewer Harding & Rowe
A deed of variation is a deed of gift by the original beneficiary, which is treated for inheritance tax and some CGT purposes only as though made by the deceased.
With joint property, the “severance” is a fiction to enable the IHT provisions, etc. to apply.
In reality, by the time the “severance” takes place, the beneficial ownership has vested fully in the survivor(s) in joint account and for all purposes (other than IHT and some CGT purposes) it is a matter of fact that the gift is made by the person making the deed – i.e. the surviving joint owner(s). The argument rests on the fact that a variation is deemed to be made by the deceased in very limited circumstances.
Paul Saunders
It is the property law analysis which I assume is relevant when examining deprivation of capital.
Property held as beneficial joint tenants is subject to the survivorship rule. As a consequence, on the death of one joint tenant his entitlement is automatically extinguished and the surviving joint tenant becomes the sole beneficial tenant. This automatic occurrence cannot be prevented (a will cannot be used for severance purposes; severance must occur in lifetime).
Executing a DoV constitutes a voluntary disposal by that person of the property identified in the DoV. The fact that IHTA 1984 s.142 permits the creation of a fantasy world in which (at least for IHT and CGT) the deceased is treated as the donor/transferor/giver is irrelevant in determining whether deprivation has or has not occurred.
Malcolm Finney
Why do you say that a joint tenancy cannot be severed by Deed of Variation? I believe it can, and I believe HMRC accepts that it can, also.
Julian Cohen
Simons Rodkin
HMRC accepts the fiction of severance for the purposes of S.142 IHTA
1984. It recognises that, post death, the surviving co-owner cannot
effect a severance but can only gift a part of their enlarged intetest.
If it were possible to actually sever post death, the “severed” share
would fall back into the deceased’s estate and me distributed by their
PR. I believe it is beyond dispute that the title, both beneficial and
legal vests in the surviving co-owner. Who is responsible for
implementing the variation.
It is important to separate the fiction HMRC allows by the use of a
variation, from reality.
Paul Saunders
Is not the position this. Deeds of variation are creatures of statute which deem certain things to have happened for the purposes of IHT and CGT only. As the beneficial interest will have passed at the moment of death, the subsequent DoV can surely only operate as some kind of renunciation of that beneficial interest under the original trust The surviving joint owner will still be a sole trustee of the original trust for sale and a restriction on the title will be appropriate. Further, or in the alternative as we say in the trade, if it be argued that the original trust terminated at death, then the Dov must operate to set up a new trust on the same terms as the old and will presumably be the trust instrument. Unless it contains any appointment of trustees, S40 TA 1925 will not apply to it.
John Gudgeon
In relation to care costs, could a deprivation of capital claim by the local authority be resisted on the basis that avoidance of care fees is not the main purpose, but rather a desire to carry out the intended wishes of the deceased?
Diana Smart
Gordons LLP
I’m not sure if, Julian, you are referring to my post.
If so, I am not saying that a severance cannot occur by executing a DoV.
I was seeking to show that the property law analysis is the relevant analysis to ascertain whether deprivation has occurred not the fictional world of IHTA 1984 s.142.
Under IHTA 1984 s.142 a joint tenancy can be deemed to have been severed even after death but for IHT and CGT is deemed to have been severed prior to death.
Malcolm Finney
I was referring to your post, Malcolm.
I agree that the property law analysis is the relevant analysis to ascertain whether deprivation has occurred.
But we are also agreed, are we not, that the DOV severed the joint tenancy? If it did, are we saying that the act of severance was an act of deprivation? I agree with you that IHTA 1984 is irrelevant for deprivation purposes.
Julian Cohen
Simons Rodkin
But there is no joint tenancy in existence after the first of 2 joint tenants has died. The survivor is the sole owner of the legal title and the beneficial interest. A DoV is merely a Deed of Gift for all purposes other than IHT and CGT. A gift, by its very nature, constitutes a deprivation of assets.
Graeme Lindop
Coles Miller Solicitors LLP
DoVs always seem to create wide interest and discussion amongst TDF members. As fast as I think I have grasped the concept I have to re-visit my understanding.
Below, I attempt to respond to Julian’s last post and in the light of the earlier posts.
I think there is general agreement that a deceased’s joint beneficial interest in property passes by survivorship to the remaining surviving joint tenant; both legal and beneficial interests are then held by the surviving joint tenant absolutely and the previous trust automatically disappears.
A DoV represents a change in the devolution of the deceased’s property compared to how it would otherwise have devolved. It appears to be accepted that a DoV may be executed under which the joint beneficial interest is to be treated as having been severed prior to death. The resulting deceased’s interest, now as tenant in common, is to be then held qua trustee by the surviving tenant for those to whom that interest is to be redirected under the DoV.
In the real world as severance is not possible post death, to implement the terms of the DoV (ie re-direction) it would seem to require that the surviving tenant declares that he holds the legal title in trust for himself and those beneficiaries to whom a redirection has been made.
Has the DoV itself effected severance? In the real world it would seem not.
Until the surviving tenant declares the trust referred to above no deprivation in the real world has occurred. Once the trust is declared effectively severance occurs and the surviving tenant is voluntarily disposing of an interest which constitutes the deprivation.
Re Diana’s point I would have thought that the DoV is not in fact carrying out the deceased’s wishes. Prima facie, the deceased as joint tenant is aware that the survivor automatically inherits and under the DoV someone other than the survivor inherits. Unless, the view is taken that the deceased according to his beneficiaries was not aware of the survivorship rule and the DoV simply attempts to ensure that those who do inherit are those who the deceased had intended to inherit.
Malcolm Finney
I think the bottom line with this is that the variation is only retrospective for tax purposes. If the variation severs the joint tenancy and creates a life interest trust, the person varying is likely to be deemed as having made the gift for the purposes of subsequent care cost analysis. It then comes down to what was reasonably foreseeable at the time.
Justin Wallace
Brewer Harding & Rowe
Sorry, my point was not relevant in this case – I should have gone back to the original post. I thought it was a situation where the Will contains a trust of the deceased’s half share of the property, and the severance of the joint tenancy was overlooked by mistake. In such a case I feel my argument might stand, but not in this scenario, where there was no trust in the Will.
Diana Smart
Gordons LLP