Variation of an Isle of Man Estate

Trusts Discussion
1

I am dealing with Probate in England of a married man who left a Will leaving his estate to his widow.
Part of his estate is a share of residue (not yet actually recieved but amount known) of his late aunt who died before him domiciled in Isle of Man.
The widow wishes to give the IOM share to her sons without using late Husbands Nil Rate allowance or having to rely on a PET and surviving 7 years.
There is no equivalent to S142 IHTA in IOM as no IHT there.
Can the widow make a deed of variation (in her capacity as ultimate beneficiary and executor of her Husband’s Will) of the late Aunt’s Will that will be treated as if the Aunt had made the gift direct to the sons without affecting Husbands transferable Nil Rate allowance and not be a PET

Christopher Hadfield
Nichols Marcy Dawson Solicitors

2

Yes, but the tax effects in the Isle of Man must be examined and the gift must be effective under their laws

Simon Northcott

3

Pre-2002, HMRC (then the Inland Revenue) accepted that the variation of the dispositions of any part of the world-wide estate of a non-UK domiciliary could come within s.142 IHTA.

I specify pre-2002 as, at that time, elections had to be submitted to, and accepted by, HMRC. From August 2002, a variation only needs to be submitted to HMRC if there is an increase, or decrease, in the IHT payable.

Whilst I can see no reason for HMRC to have changed its approach, I am conscious that it has done so on a number of aspects relating to s.142, the most memorable being when it decided that a variation could no longer be used to “write out” a life interest after the death of the income beneficiary.

Having said that, unless a variation affects the IHT in the estate in question, it appears HMRC has no interest in the mater and will not/cannot insist on seeing the variation. However, as the variation in question would be an unusual situation, I wonder if it would be captured by GAAR provisions?

In any event, if making a variation over an asset, or estate, outside of the UK, I suggest that in most instances the variation should not be made until the assets have been remitted into the UK. The reason for this is that s.142 only applies within the UK and the redirection of non-UK assets may give rise to gift tax or other levy in the jurisdiction in which the estate or asset is situate. Although some jurisdictions have provisions similar to s.142, it would be necessary to comply with the local requirements as well as those within s.142 if unexpected tax consequences are to be avoided.

I short, I believe that the widow should be able to proceed as suggested, although it could be open to challenge by HMRC.

It will be interesting to see if other contributors have had experience of cases where HMRC has had to rule on a similar situation.

Paul Saunders

4

If the Aunt died domiciled in the Isles of Man, would it not be the Manx law and legislation which would apply to her estate, and not the English jurisdiction?

I am assuming perhaps mistakenly that the assets she left in residue are in the IoM, but even if not, there may need to be a variation in the IoM even over UK situs assets.

If the deceased husband has not appropriated the property, in one way of another, it might remain outside his estate as such, and might escape the widow’s ability to vary the aunt’s will on that basis.

Perhaps best to start from the IoM with assistance from a Manx lawyer and then work forwards to see whether the Husband or his estate has actually been seized of the property under Manx law?

That way there would be no question of the widow using up her UK advantages, merely any as may be available to the Aunt.

Peter Harris

www.overseaschambers.com

5

With regard to Peter Harris’s observations, if a variation is made after the assets of the estate have been remitted/transferred to the beneficiary in the UK or, if the estate has not been fully distributed, is limited only to those assets which have been remitted/transferred to the beneficiary in the UK, Manx Law ceases to apply.

The reality then is that any gift is a gift of the assets in the hands of the UK beneficiary and it is the fact that a UK person is making a gift of UK situs property that enables s.142 IHTA (and s.62(6) TCGA 1992) to apply to that disposition without regard to the fact that the assets derive from a non-UK source, i.e. the Manx estate.

I agree that if the beneficiary attempts to deal with the undistributed estate, or assets within the Isle of Man (or some other jurisdiction outside of the UK), then Manx Law (or such other law) will apply and “local” advice will be needed. However, once assets have been distributed and are within the UK, that connection is broken.

Paul Saunders