Parties to a Deed of Variation

Trusts Discussion
1

I have come across a case where person A died and left her whole estate to B. B is now dead and B’s executor is EX and the residuary beneficiary is RB. Now, RB wants to vary the position so he still receives the money, but via A’s estate (resulting in less tax on B’s estate).

I’ve come across a DofV that has been prepared with the parties being EX and RB, but only signed (in time) by RB and we are now out of time with EX not having signed it.

Is it a valid as it has been signed by the ‘beneficiary’ of B’s estate, notwithstanding the ‘Deed’ looks incomplete. I am comfortable with the requirements that it is signed within time and that it does not have to be a Deed. My issue is, has it been signed by the correct party.

(also - it has not been dated, but it can be ascertained that it was clearly signed in time from correspondence)

Kamlesh Samji
KRS Estate Planning

2

An executor is only a necessary party to a deed of variation if the result of the deed is to increase the IHT on the varied estate and I assume that is not the case here. So it seems on the evidence that the deed has been substantially executed. It is troubling that it hasn’t been completed as it was designed to be, but I think that the execution by RB is sufficient. Indeed, given that no extra tax was payable, could the executor have refused to execute the deed, the only purpose of his execution being to acknowledge notice of the variation?

Equity looks on that as done which ought to be done

Tim Gibbons

3

B is the beneficiary of the estate of A.

Following the death of B, the beneficiary is EX, as executor of B’s estate.

s.142 IHTA 1984 requires a variation is made by the beneficiary, in this case now EX.

Whilst RB is the beneficiary of the estate of B, they have no legal right to deal with any of the assets in B’s estate until such time as they are appropriated or transferred to RB or their nominee. Unless EX had assented the right to receive A’s estate to RB, RB has no legal title and, if the entitlement had been appropriated but not assented, then EX would hold the legal title on bare trust for RB.

Prima facie, the variation would appear to have failed.

However, HMRC will not accept a variation made only by the personal representatives of a deceased beneficiary, usually requiring that those entitled to the deceased beneficiary’s estate also join in the variation or otherwise signify their consent to the terms of the variation.

In view of HMRC’s interpretation of the requirements to comply with s.142 in these circumstances, is there anything to be lost by submitting the variation to HMRC to see if it will be accepted.

Who gave instructions for the variation to be drafted? If EX (or EX drafted it), then they would appear to be consenting to the variation (otherwise they would not have passed on the instructions, or drafted the document) and this might be sufficient for HMRC to accept the variation. It might also be worthwhile considering why EX had not also executed the deed.

Paul Saunders

4

Whilst, strictly speaking, the executors of B’s estate are required to enter into the DoV under IHTA 1984 s142(1) (as the persons who benefit under A’s disposition) HMRC it seems accept that the beneficiaries of B’s estate who may execute the DoV without the executors involvement
[see: https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm35042].

Malcolm Finney

5

Malcolm Finney has identified the gap between what HMRC will accept, and what is necessary in the “Real World” to which HMRC alludes when it suits.

The example at IHTM35042 assumes that there is no bar to the beneficiaries of W’s estate dealing with W’s entitlement to H’s estate, despite the fact that they have no legal title to it and, in any event until (or unless) it is appropriated to them, may have no beneficial interest in H’s estate at all. Without the value of H’s estate, W’s estate could be insolvent or there could be other claims on it which will potentially be affected by the variation, yet HMRC appears unconcerned.

If the variation executed only by the beneficiaries of W’s estate is presented to the executors of H’s estate, what are they expected to do? If they account to the beneficiaries and, subsequently, EX, as executor of W, submits probate and says “transfer the assets to me” the executors of H are in a pickle as they have given the estate away with no legal authority. If the deed had been executed by EX, it could perhaps reasonably be understood that the variation is itself an implied appropriation/assent of the right to H’s estate to the beneficiaries under the deed.

My personal view, which I accept is at odds with IHTM35042, is that the personal representatives of the deceased beneficiary should always be a party to any variation of that beneficiary’s entitlement if, as at the date of the variation, the entitlement from the first estate which is to be varied has yet to be transferred into the control of those purporting to make the variation. It is only the personal representatives of the first estate who I would not normally expect to be a party (in the light of the closing words of s.142(2A) IHTA 1984).

I am told that HMRC’s view is “pragmatic” as otherwise it would reject too many variations as they are executed only by the beneficiaries and not by the personal representatives of the deceased beneficiary. However, if executed by the personal representatives, but not their beneficiaries, the personal representatives can be put through hoops to prove the beneficiaries consent to the variation (even if it is wholly in their favour). Inconsistent?

Rather than educating the drafters of such documents to use formats that comply with the legislation, HMRC accepts what, in relation to other matters, it would call “shoddy” and reject out of hand. Does this promote “good practice”, let alone “best practice”?

Paul Saunders

6

Paul, as always, makes a number of both interesting and incisive comments with which it is difficult to disagree (and I do not propose to disagree). Perhaps I may add one or two observations which reflect my understanding of the DoV concept and trust I will be corrected if I am somewhat misguided.

My interpretation of IHTA 1984 s142 in the circumstances recounted in IHTM35042’s Example is that under s142(1) it is the PRs of W’s estate (alone) who “as persons who benefit under the disposition [of H]” must execute the DoV, not W’s beneficiary. No doubt before so doing, W’s PRs would have received written instruction from W’s beneficiary to this effect available for production to HMRC as and when necessary. Accordingly, I do therefore find it surprising to note that HMRC seem relaxed in accepting a DoV executed by W’s beneficiary alone [as per IHTM35042’s Example]. On the other hand, I could forsee a problem where W’s PRs fail to obtain probate of W’s estate within two years of H’s death (eg if W’s death occurred close to two years after H’s death).

Paul makes reference to W’s beneficiary requesting H’s PRs to deliver the relevant property to W’s beneficiary. Assuming it is W’s beneficiary alone who executed the DoV it does not then follow that the PRs of H’s estate would be within their remit to simply convey H’s estate directly to the beneficiary of W’s estate. To do so would fail to appreciate that the acceptability of the DoV to HMRC means only that a tax fiction is permitted (ie back-dating for IHT and CGT purposes). Once H’s estate is administered it is to W’s PRs to whom any assent should be made as it is they who on W’s death acquire both the legal and equitable interests in W’s property. It is then for W’s PRs to effect any assent either to W’s beneficiary (for onward transmission) or, at W’s request, to the ultimate beneficiary identified under the DoV.

This would also seem to deal with Paul’s understandable concern regarding W’s possible insolvent estate.

Malcolm Finney