Deed of variation after a gift

Trusts Discussion
1

Hi

I think this has been discussed on the forum briefly before but at that time opinions seemed to be split on this and I wonder what members views are now as I have a similar situation.

Scenario is that client has already inherited from her mother’s estate, the inheritance was cash and has been banked by the daughter. So original beneficiary has received an inheritance from her mother’s estate. Having taken advice from her FA they have suggested that she asks for a DOV to be prepared - we are still within the 2 years from her mother’s date of death. Client would now like to draw up a DOV to gift part of the inheritance to her own children and part to a discretionary trust. The reasons being that her own estate is already a taxable estate, so for planning purposes and to help her children who would benefit now from the money. Client has already transferred a portion of the inherited money to each of the children and intends to transfer the rest later.

  1. Is there any issue with the fact that the mother’s estate has been distributed and client has banked her inheritance, can she still enter a DOV to cover the amount received?
  2. Regarding the sums already transferred to the children, can this still be brought under the DOV. This is the main element which I have seen differing opinions on. I have seen comments from a few solicitors stating that it is too late now and that the deed of variation should be signed before any transfer is made from the original beneficiary to the new beneficiaries. Another commented that you can’t later try to formalise a transfer that has already taken place. However my understanding was and I have read other opinions suggesting that it should not be an issue as long as the DOV is signed within 2 years and meets with the other requirements then a gift that was made earlier can be included so in effect what is a PET now would then be deemed as a gift from the deceased under the Will rather than as a PET by the original beneficiary, under the fiction created by the DOV? I think my confusion comes from comments saying that this can not be done because the gift was already made so you can’t later formalise the arrangement but it is all a fiction just for specific tax purposes so then why can this not be done?

I would be grateful for current views on the above and whether anyone has had the same or similar situation and what their conclusion/outcome was?

Thanks

2

Mindful that a deed of variation is in reality a deed of gift, the variation would create a further gift.

I recall discussing this situation with Peter Twiddy (back in the days) and his view was that a variation cannot be made in relation to a gift that already existed.

I am aware that some practitioners take the view that as s.142 IHTA is merely a deeming provision it can be called upon, but I question how many of deeds purportedly applying s.142 in retrospect have been accepted by HMRC. Under the current regime, unless it affects the IHT position in the estate of the deceased a DoV does not need to be submitted, so it may be that HMRC has not been required to comment in recent years (perhaps not since 2002). In which case there can be no certainty that a variation purportedly bringing an earlier gift within s.142 does do so – a timebomb for those who advise otherwise!

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

3

Thank you Paul. Yes I can understand your views on this.

Does anyone support the opposing view on this and it would be interesting to hear from anyone who has tested this/ had this accepted by HMRC?

4

I was never a great fan of Mr Twiddy’s views. I have a precedent which I have called “Anti-Twiddy Clause”. I can’t remember the precise context but it is a clause permitting trustees to satisfy the NRB legacy to be held on a DT by something other than the payment of cash. The contemporary view as I recall was that his opinion that it could not be done without such a clause had probably been vouchsafed unto him by divine intervention (allegedly), curiously in favour of HMRC.

s142(6) permits a variation even if admin is incomplete and even if the relevant property has been distributed in accordance with the original dispositions to be varied. But the variation can only rewrite those dispositions and for tax purposes only. So I agree with Paul (and grudgingly with Mr Twiddy) that if any subsequent act or transaction has affected the property s142 can do nothing to deprive that act or transaction, including a gift of it, of its legal including tax consequences. This is not entirely convenient. Given reading back for CGT, what is the base cost of the donee of the gift? Is it market value at the date of death as he takes as legatee or perhaps a much higher market value at the date of the subsequent gift? An election to read back for CGT might be an own goal.

Jack Harper

5

CG31630 says: "

  • If the assets have vested in the legatee and the legatee has disposed of the assets before the deed is executed, then the disposal is no longer treated as an occasion of charge for the legatee. Instead it is treated as an occasion of charge for the assignee"
    HMRC seem to be saying that a subsequent disposal by the original legatee, here the later gift, would be treated as a disposal by the later donee. Fine-- if the disposal is a sale or gift to a third party but what if, as here, it is to the same person who is deemed to have acquired it under the variation. He cannot make a disposal to himself. If the later gift is a CLT can CGT hold-over relief apply?

IHTM pays no attention whatsoever to the possibility of an actual lifetime gift of assets prior to a variation (nor to a gift of a chose in action comprising the right to them, which s91 IHTA would apply to).

But there is a helpful comment tucked away in CG31850 which, most unhelpfully, is entitled “sale of legatee’s interest before assets vest”. It also overs gifts. It says: “A legatee may decide they wish to give the assets they are due to receive from an estate to some other person. This is often achieved by executing a deed of variation, see CG31600+. Occasionally the legatee simply gifts his or her interest in the estate to the other person. Such a gift is a variation of the devolution of the estate.If all other necessary conditions are satisfied an election under TCGA92/S62 (7) can be made. This will result in the gift being treated as retrospective to the date of death for Capital Gains Tax purposes, see CG31630+.”

So they seem to be saying that if the original legatee gifts her interest in the estate it can itself be a variation with reading back. Why is it not such just because the gift is not of her chose in action but of the underlying assets which it represents? It is hard to see that this distinction is justified given s62(9) TCGA.

It is notable that neither Manual has anything to say about s142(6) IHTA or s62(9) TCGA or their operation. They are deeming provisions, fraught with all the usual fandango about how far the fiction can be taken. One cut off is when extrapolation ends in absurdity. This is surely what happens for either tax where the original legatee has made prior to the variation a gift to the person to whom the asset is re-directed by it. Surely it is not a step too far to apply the deeming to nullify that gift, especially as a sale rather than a gift will prevent reading back. In addition to this erudite approach, it seems arguable more simply that her gift is itself a variation. If that succeeds it is amazing that HMRC’s view is not given more prominence.

2 years is very short as a time limit. I suggest you contact HMRC, both branches. You could use the Non-Statutory Clearance Service which promises a reply “normally” within 28 days, so tell them how much time is left. There is no specific Annexe template but IHT is covered so you need to create your own submission. days https://mail.aol.com/d/list/referrer=newMail&folders=1&accountIds=1&listFilter=NEWMAIL/messages/ABtRGz4k5D1cZkX7SwxnyCD4uBg. It will help that the transaction you are concerned about has occurred, even if the variation has not, and that the latter is not tax avoidance.

You can e-mail your request and it seems that is a one stop shop:

"Non-statutory clearance or approval

You can find information on the clearance service offered by HMRC for customers and their advisers who need clarification on guidance or legislation relating to a specific transaction.

Non-statutory clearance applications should be sent to:

Wealthy
HM Revenue and Customs
BX9 1BN

Email: nonstatutoryclearanceteam.hmrc@hmrc.gov.uk"

What “Wealthy” is all about I have no idea. I presume it does not apply to those who deal with requests at HMRC, sed quaere.

Jack Harper

If the gift is a CLT can CGT hold-over relief apply?

6

Last sentence should have been deleted

7

Interesting.

What is the situation when; a sole PR, also the beneficiary of the Will ( who we will refer to as “A”) after the expiry of the 2 year Administration Period compromises probate litigation with a High Court Tomlin Consent Order without any hearing where a relative ( who we will refer to as “B”) receives a percentage share in the Unadministered Estate as a result of that Order and then later;

  1. “A” Obtains a Grant of Probate. Then;

  2. “A” Assents the beneficial interests only in House 1 where B is living to A and B and subsequently sells it to a third party.

Note: The property value was under declared firstly at the point of the limited grant 1 year after death and secondly at the time of full probate obtained four years later, resulting in a CGT gain.

  1. “A” Assents the beneficial interests only in Land 2 to A and B and subsequently sells it to B at market value giving allowance for B’s equitable share.

Note: The property value was under declared firstly at the point of the limited grant 1 year after death and secondly at the time of full probate obtained four years later, resulting in a CGT gain.

In this scenario;

  1. Who pays CGT and when ?,

  2. Can “A” claim re-imbursement for CGT from the Estate ?

  3. What useful references and precedents are there that cover the above situation ?

Regards

Mark

8

A is the original Legatee and B has an assignment of A’s chose in Action as a result of the Tomlin Order.