Deed of Variation after gift made

Good afternoon. Here’s the situation:

M died and left entire estate of £550k to D.
D gifted cash of £100k to Y.
D then took advice. She is elderly and was advised to vary M’s Will to give the entire £550k estate to other beneficiaries - including Y.

Can the Deed of Variation be used to (for want of a better expression) “cancel” the PET made to Y and instead deem that cash gift to have been made under the Will of M?

I have seen a similar discussion regarding a Dec of Trust made prior to a Dof V and @malcfinney1 and @paul considered the same points I have re consideration, but this case involves cash rather than property so I wondered what people’s thoughts were?

Thank you

Yes, if the DOV is within s142 IHTA e.g. within 2 years etc. It will not matter that the gift by D to Y has taken place because the effect is for IHT that the will has left a legacy of £100k to Y and the residue of only £450k to D.

Jack Harper

I don’t recall any contribution I may have made on a similar topic !

It may be that the property left by will may have been distributed to the original beneficiary under the terms of the will but this of itself does not preclude a DoV from being executed [iHTA 1984 s142(6)].

However, if the monies inherited have not been kept separate from the other assets of the beneficiary not derived from the estate (eg have been credited to a bank account consisting of other unrelated monies) back-dating treatment under s142 may be denied. The property re-directed must be capable of being shown to be derivable/traceable from that originally inherited.

Malcolm Finney

I cannot agree with Jack.

Once the gift is made it is no longer within the original beneficiary’s ownership, so that a subsequent variation has no dispositive effect – they are purporting to give away something they no longer have.

The variation in question could only be effective over the remainder of the estate to which the beneficiary is entitled.

At a time when those at HMRC Nottingham knew what they were talking about, I had discussed a similar scenario with them and they had no doubt that a variation could not validly include an already completed gift. Since August 2002 we are effectively self-certifying the validity of a variation which is believed to have no IHT implications, so it comes down to whether the professional adviser truly believes a gift can validly be the subject of a subsequent variation, and I know what I believe.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

1 Like

I can see that in the real world D cannot give away what he has already given but in the DOV’s fictional world he is not doing that. He is varying the Will so that its provisions are and are to be treated always as having been different. If D had cashed up the residue and spent it all in a casino he could still vary the will to save tax on the estate. In this case, unless the new beneficiary of residue was the surviving spouse, it would not seem to have that tax effect. A variation within s142 is not conditional upon a tax saving.

Paul and Malcolm, am I to understand that D could not vary the will within s142 to redirect a legacy, or as in this query the entire residue, to a surviving spouse to save all the IHT otherwise payable? Outside 2 years such a DOV would still be a legal possibility; while the original Will provisions would have taken effect, it would still be possible to vary those provisions, although the gift by D would be a PET/CLT and an additional one to boot. If D was not careful to deduct £100,000 from the redirection of “the residue” in the document he would end up having given away in total £650,000!

I did not mean to say that because the DOV was within s142 it could expunge the lifetime gift of £100,000 already made in the real world. That is self-evidently not a case in which “(a) any of the dispositions (whether effected by will, under the law relating to intestacy or otherwise) of the property comprised in his estate immediately before his death are varied”. It has not been possible to expunge a valid lifetime gift since the exemption for mutual transfers was repealed by FA 1986, s. 101 and Sch. 19, para. 25 and s. 114 and Sch. 23, Pt. X, where the donee’s transfer is made on or after 18 March 1986. If D made such a variation it would be an additional PET/CLT as I say above.

I think I may be agreeing with both of you on this. My entirely uncharacteristic aberration of brevity entrapped me and I have now reverted to type.

However I do not follow at all Malcolm’s apparent suggestion that, in order to be valid, a variation cannot be effected in the fictive world if there is non-segregation of or an inability to trace relevant assets in the real world.

HMRC seem to live in whichever of world suits them at any given time. This is often enforced by their published view and the line of least resistance is to accept it and make a different variation. It is not at all clear to me why a life interest that has ended in the real world prior to the variation cannot be varied by it in the fictive world but this ipse dixit is enshrined in IHTM35042. This will never be tested unless one of the Great Ill-Advised or DIY aficionados steps into the cowpat. (It might be a valid disclaimer, say HMRC, involving the double jeopardy of unintended consequences). “You should refer any case where the taxpayers will not accept this view to Technical.” Legislation by proclamation again and with menaces.

Jack Harper

It is the gift made under the will, not the actual property comprising the gift, which s142 redirects. Hence, why there may be a difference between the property comprised in the deceased’s estate and and that comprised under the redirection [IHTM 35025].

In the present case although the issue relates to a variation of the residuary gift the property of which residue is comprised does not need to be the same as that held when the DoV is executed. Nevertheless, it must be possible to trace/match the property comprised in the original gift with that being varied. Hence, my expressed concern where what was originally due to the original beneficiary is, for example, cash which is then mixed with cash already possessed by the beneficiary which has arisen not from the deceased’s estate. In such a case ensuring that what is re-directed is part of the original beneficiary’s inheritance may be difficult to prove. Cash is fungible and is difficult if not impossible to trace through such a mixed bank account [IHTM 35026].

Paul raises a slightly different issue which, if I understand him correctly, is that once the original beneficiary has gifted some part of his inheritance (residue worth £550k) under the will (ie the £100k) that element can no longer be subject to any variation as at the time of the variation it will no longer be within the beneficiary’s ownership. Thus, only £450k can be subject to a DoV. I’m not convinced of this argument and believe £550k can be varied. The £100k was clearly part of the gift of residue and thus capable of variation irrespective of whether at the time of execution of the DoV the original beneficiary still possessed those monies.

Malcolm Finney

Malcolm, I see what you mean. Certainly “residue” or shares in it can be redirected by a document in the fictive world but those who have to action it in the real world must be able to ultimately identify what assets it comprises. The document cannot clothe the PRs or other parties to it with any additional legal or equitable remedies to follow or trace the deceased’s assets. Assets originally given by the Will cannot be clawed back from a bona fide purchaser without notice, but the sale proceeds will then form part of residue for the time being.

If an asset an asset originally comprised in residue is appropriated to a residuary beneficiary, and is given by him in the real world to a donee before the variation, the donee, although a volunteer, is unlikely to be amenable to being lawfully divested of it in the real world by an act that applies only to tax. The same would apply if the donor is a specific legatee. Residue is just an inchoate concept until it is ascertained. When that happens it becomes concrete and comprises specific assets, which case law says the PRs should only then sell with consent of the residuary beneficiary. Residue is most unlikely to be either ascertained or ascertainable, even with hindsight, at the date of death and its prospective value may fluctuate. The donee of a DOV who takes it or a share in it has to accept that.

Theoretically a variation can extend to any “property comprised in his estate immediately before his death” i.e. owned for IHT by the deceased at the date of death or of which he was then “competent to dispose” for CGT. But if such property has been since sold or distributed, while not excluding a variation of its original destination, that precludes a variation of anything other than its sale proceeds, if sold, and not at all if it has been validly given away already. Will drafters are aware of the need to consider the possibility of ademption and extend a gift to its sale proceeds if so instructed. This would apply to a donee of a DOV who takes a specific asset. The drafting of the document must operate in the real world as regards what it can factually and legally achieve in practical terms as of the date the DOV is executed. An aspect of the drafting is to envisage exactly how the document can be implemented, to head off unintended consequences, confusion and arguments about its precise effect. If it changes the amount of tax and its incidence, who now must pay it is another practical outcome that the drafter must predict. Even Parliamentary Counsel fails sometimes to achieve that salutary objective with deeming provisions of statutes.

Jack Harper

I think it is this mix of “the IHT fiction” and the “real world gift” that has me going around in circles. I get that you can’t claw back and regift something that has already left your hands, but for the purpose of the writing back and the IHT treatment of s142 I can follow the reasoning that the deed of variation can retrospectively apply to cash already handed over.

But do I just follow that reasoning because it fits my client’s circumstances?!

Hi Emma

What did you end up deciding in this scenario?