DOTAS and Deeds of Variation

We have a debate in the office about DOTAS and the Professional Conduct in Relation to Taxation guidance with regard to deeds of variation.

HMRC guidance states that deeds of variation are not notifiable as they are not a breach so this is not in issue.

However, our debate arises with regard to situations where a beneficiary dies before making a deed of variation in which case, a variation can be done to vary the second deceased’s entitlement in the estate of the first deceased. It is often the beneficiaries of the second deceased who will make the variation but HMRC accepts that the PRs of the deceased beneficiary can make the variation subject to various conditions. The guidance is contained in IHTM35042: https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm35042.

Apparently some HMRC reps said at a STEP conference that some DoVs could be notifiable and we’re just wondering whether this type could be. Does anyone have any thoughts on this?

Claire Ritchie
Hart Brown Solicitors

I think that for IHT purposes the DOTAS rules require some ‘contrived or abnormal’ steps within the arrangements and that there should not be an existing ‘scheme’ that HMRC has indicated its acceptance of. Since HMRC is aware of this ‘scheme’ (to the extent that it is referred to in its own manuals) I struggle to see why DOTAS would apply to it.

Paul Davies
Clarke Willmott LLP

Thank you for replying Paul. It’s good to have another opinion on the matter and I would tend to agree with your view.

Claire Ritchie
Hart Brown Solicitors

I think HMRC usually focus on arrangements where a DOV diverts funds to the surviving spouse to benefit from the spouse exemption. They are concerned that the spouse may do a deal with the beneficiaries who gift their inheritance so that the funds end up back with the original beneficiaries in the end (see HMRC v Lau [2009] STC (SCD) 352).

Mary Ambrose
Thomson Reuters (Practical Law)

Thank you Mary. That’s good to know as I have been trying to think of scenarios where a DOV would be a problem.

Claire Ritchie
Hart Brown Solicitors