My charity is one of 13 charitable beneficiaries of a residuary estate. The deceased died a year and a half ago and her property was sold for a capital gain by the lay executor just over six months ago. Unfortunately, the property was not appropriated to the charities prior to sale and so, as it stands, we are unable to use our exemptions to mitigate/negate a potential CGT liability of £25,000.
My question is: can we instead enter into a Deed of Variation to vary the terms of the Will so that rather than forming part of the residuary estate, the property is left outright to the charities, meaning any gain would by covered by our exemptions?
Many thanks for your help
I’m not sure of HMRC’s views on this matter. However, I’m not sure that there isn’t contradictions in their CGT Manual on this matter.
Para 31630 provides in part:
“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”.
In other words you can achieve what you suggest.
However, paras 31600 &31601 provide:
“An instrument of variation may be executed even if the assets involved have already vested in the legatee. This is given effect by the original legatee gifting the asset or property that derives from it (such as the sale proceeds if they have already disposed of the asset, see CG31630) to the assignee…
but after the assets have been disposed of by the legatee then subject to CG31600 the disposal proceeds from the disposal of the assets pass from the legatee to the assignee”.
It’s an interesting proposition, but I wonder if HMRC will accept that the variation has actually effected a “disposition”?
If the property had been sold in estate A and the charities were the beneficiaries of estate B, which was the sole beneficiary of estate A, then a variation in estate A to create a notional specific devise in favour of the charities would work. However, I do not believe it will necessarily work where you are purporting to take the property out of residue and gift it to the residuary beneficiaries as though it were a specific devise. To work, I believe it needs something more – perhaps another charity might be included – do any of the charities have a sister charity that might take their place?
If the variation is effective, then HMRC agreed with STEP a couple of years ago that the disposal for CGT would be that of the beneficiary, not the estate.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
What is the downside of entering into the variation? What legal effect would it have if it worked for tax or if it didn’t? If it is to provide a share of a specific gift instead of a share of residue the charity is no worse off whatever the tax outcome. There may be an objection to whether the variation is or can be made retrospective in law but for tax purposes such an objection never seems to be taken (though it must be “validly made”: CG31668). The only impossibility recognised by HMRC is the redirection of a life interest after the life tenant has died: IHTM35025 but also true for CGT.
CG31600 also says “A person who executes an instrument of variation in relation to a will or intestacy provisions gives up his or her right to receive assets or interests or a share of the residue that he or she would otherwise have received” and doing so is not “consideration”. CG31660 says where the tax conditions are not met “If the assets have vested but have been disposed of by the legatee before the deed is executed, the disposal by the legatee remains a chargeable occasion for that legatee. When the deed is executed there is no further chargeable occasion as regards those assets, either for the legatee or the assignee, but there may be a chargeable occasion if other assets pass”. So even if the variation does not work for tax there is no downside other than costs of advice and, if need be, corresponding with HMRC.
A charity may want to be advised that the variation is validly made, and whether its legal effect is retrospective, but that it seems to have no legal downside, as long as it does not deprive the charity of anything if it is a nullity. I agree with Malcolm that it has a distinct possibility of working for tax as HMRC seem prepared to accept any fictional redirection save the life interest issue above. Presumably they accept a variation in such cases as validly made as long as it has legal effect as between the parties even if it purports to effect a fiction redirection by them.
Many thanks for your replies, which are very helpful and provide much food for thought.
I will discuss with the other charities and, if we do try the Variation, will let you know how it goes.
I was wondering how you got along with this in the end?
Sorry, I forgot to update the thread. Having discussed with the other charities, we decided not to take the DoV idea forward and accepted the CGT liability.
Looking back at your original question, it wasn’t clear whether or not the estate was liable to inheritance tax thus requiring an IHT 400 to be submitted. If it was not liable, then I presume that the value used for probate purposes was never referred by HMRC to the valuation office, in which case the value used would not necessarily be the base cost for CGT. Is it possible therefore that the probate value was too low and was possibly nearer to the sale price obtained a year later, thus reducing or eliminating any CGT liability? Just a thought!
Although the estate was below the NRB and so not IHT was payable, it was over £2m and so the Executor completed an IHT400
Thanks Kate, my understanding is that HMRC will not wish to incur the internal costs of involving the district valuers office if there is no likelihood of tax being payable in the estate. It is possible, therefore, that the value produced for the date of death may have been understated and it might be worthwhile seeking a second opinion from a chartered surveyor, unless the chartered surveyor who valued it (assuming it was achartered surveyor, who did this) would be prepared to reconsider his/her valuation.
Thanks Kate, much appreciated