Deed of Variation and Consideration

Trusts Discussion
1

It is clear that you cannot give consideration for a DoV. However my client wants to give a company she has inherited to her late husband’s son, but to retain a car owned by the company. If the company is given on condition that the car is given to my client would this be classified as consideration and if so, does this jeopardise the entire tax benefits?

The agreement pre-death was always that wife would give son the company, subject to keeping the car, and it is just intended to follow this through.

2

I think it would be consideration - sounds a bit like example 3 on IHTM35100.

Would it work if the company were valued and then the beneficiary paid for the car with some of her shares (up to the value of the car) and then did a DOV over the rest of the shares?

3

The company owns the car. I cannot see how the beneficiary can use her shares to pay for it in a straightforward way.

The company could purchase some of her shares and discharge payment by the transfer of the car but this will be liable to income tax as a distribution: CGT treatment will not at first blush meet the benefit of the trade requirement. It could pay a dividend but I assume there is likely to be no CGT gain given OMV at death base cost.

However it may be worth seeking statutory clearance because of CG58635 and SP2/82. HMRC accept that the benefit of trade test can be met where a beneficiary who inherits shares does not want to keep them. While a sale of part of an inherited shareholding in isolation might not satisfy HMRC, if coupled with a variation of all the other shares the overall transaction, constituting 100% divestment, it might prove acceptable. And it is not some random jalopy but is presumably a car made available to the deceased as an employee or director with permitted private use.

An employment income charge will be avoided if the purchase price of the car is its second-hand value: ITEPA s.62(3)(b) with ss.13(4) and 30.

HMRC will probably not be prepared to rule on the s142(3) consideration point as it is not germane to the CGT issue and is anyway the province of a separate unit. If you get the CGT clearance a non-statutory clearance can be sought from IHT: correspondingly the CGT/income tax characterisation of the OSP should not affect the point as to whether a non-gratuitous transfer by the company is consideration for s.142(3). To save time there would seem to be no harm is seeking both clearances simultaneously.

There are two transactions plainly involving contractual consideration, the purchases of the shares and the car, but it is hard to see how the ultimate transferee of the shares gives any consideration “for” the variation. IHTM 35100 example 3 indicates that HMRC take the position that the consideration need not actually move from the transferee of the variation and the wording of the statute certainly does not require that it should. So any consideration given by the company would seem to suffice. The consideration for the shares, if equal to their market value, cannot also be for the variation. The transaction should not be made conditional upon the variation occurring; although I am not convinced that this matters it might be a rad rag to a bull. The market value consideration paid by the person making the variation is given only for the car and again should not be conditional on the variation. Oddly consideration moving from that person is also not specifically carved out of s.142(3)!

Any clearance application and/or separate presentation of the facts to HMRC should take care to indicate (without stridently rubbing it in) that although the OSP and car sale are connected with each other neither is necessarily connected with and is independent of the variation: because both operations are in fact contemplated, the beneficiary is a party to both, the law is vague and the guidance not explicit, but the downside —non-acceptance by HMRC that s.142(1) will apply—is so potentially disadvantageous that it seems appropriate to the making of full disclosure. Of course I trust that this pious assertion is genuinely the case or otherwise it should not be claimed to be true.

Jack Harper

4

If the client currently owns the shares (rather than the estate) and the company has distributable reserves at least equal to the net book value of the car I think the company can pay a distribution in specie ( ie a non cash dividend settled with the transfer of an asset). The distribution value should be the net book value (otherwise the company would incur CGT) and will be subject to income tax at the recipient’s marginal rate for dividends after dividend allowance but on the market value.

Recipient must report on their tax return.

Care is needed with the wording of the dividend resolution to ensure company distributes the net book and not market value from their perspective, and also to make clear whether it is an interim or final distribution.

5

But is it consideration within s.142(3)? It is gratuitous. It does not have to move from the person who will benefit from the variation. I do not think it should be but the law and the guidance is not wholly positive. An analogy would be let property: it would not prevent a variation (as opposed to a disclaimer) that some rent was received ahead of the variation. The specie dividend will be as you say income taxable.

Jack Harper

6

Perhaps a closer analogy would be if the widow limited the value of the assets to be paassed over before variation by for example stripping out all the distributable profits by dividend such that the son benefits from the future success of the company only. Is that any different from say varying in respect of only a proportion of the shares for s142 purposes?

7

Sonia makes a very good point.

I may indeed have overegged it by suggesting an OSP. I was probably mesmerised by the possibility of taking advantage of the OMV CGT base cost of the shares.

It is a cumbersome operation at the best of times and hedged about with restrictions (see CTA 2010 ss.1033-1048). We are not told anything about the company. It must be an unquoted UK resident trading company. The shares must have been owned by the deceased for 3 years: s.1038(3). Not least, the sale and variation must be timed carefully to ensure a substantial reduction per s.1037. The safest way is for the variation over the main parcel of shares to precede the OSP, although clearance may be given despite the particular timing as it will be clear that the overall plan contemplates 100% divestment, so HMRC may not nit pick about the order as long as the interval is vestigial in length.

So an ordinary dividend discharged by the car transfer or a specie dividend will work and I am (and Sonia is by inference) of the view that this is not consideration for s.142(3) IHTA. In point of fact there is no steer from IHTM or case law and the statute is acutely parsimonious as to any definition of the term. NSC would thus seem prudent.

The dividend would be liable to income tax, which may or may not be acceptable in amount and preferable to simply buying the car from other resources. We are not told anything about the type of car or its value. Some of my former clients were very self-indulgent with their company cars and I recall several Bentleys and Range Rovers, a Porsche 911, and even one Rolls Royce. The tax on a dividend could be chunky (though it would also neatly dispose of the employment income point).

I would add that the company will have to bring in market value as the disposal value for capital allowances and there may well be a balancing charge. Since 2008 allowances for cars have been more generous, even if not “main rate” cars. However, the position is no different to an OSP where the car is in effect “sold” to the shareholder to discharge the price for the shares, which would be designed to equate to the OMV of the car. So CT on the clawback of allowances would be a cost of doing business either way. My above-mentioned clients were impervious to their BIK and the company’s CAs, naturally!

Jack Harper

8

My first thought would be whether the Deed of Variation could simply redirect the company (or shares) to the son while specifically excluding the car from the variation?

9

The car is owned by the company. It is not an asset of the deceased’s estate, so there is no disposition of it which can be varied.

Jack Harper

10

I may be missing the point but if she has inherited the company and is a director, what stops her from resolving to gift the car to her first? The Deed of Variation does not have to refer to the car at all. She is not the company. The company is gifting the car. There is no consideration coming from the Estate.

11

Interesting!

I take the view that this can be done.
Consideration internal to the estate is fine. And there is nothing to stop a testator, by their will, directing their executors to use their powers as shareholders of a company the testator controlled to extricate a particular asset from the company. Indeed, many Commonwealth authorities have construed wills which leave assets the deceased didn’t own directly, but through a company, as such a direction (see the citations in the recent case of Sean Hughes deceased (Hughes v Shelter), though in that case the court construed the gift of properties owned by a company as a gift of the company itself).
So I can see no reason why the variation should not rewrite the will to direct the executors to procure a transfer of the car by the company to the original legatee, and subject to that to transfer the shares to the new beneficiary.

Alexander Learmonth KC

12

Contributors have suggested that but have pointed out the tax consequences for her and the company. The key fact omitted from the OP is its market value.

Jack Harper

13

As Jack points out, the value of the car is an important fact, as is its type. The tax on dividends is at a lower rate than other income. A straight gift by the company to a shareholder/ PSC would not be tax free.

Another possibility is that if the widow is a director, employee or officer of the company that could be perpetuated perhaps in an honorary type arrangement with the car as the only remuneration with a view to transfer by whatever means is most tax efficient at a later date once the car is further or fully depreciated. The total tax on the benefit and later transfer might be less onerous if it is for example a hybrid or electric car. All scenarios to be considered for the most effective outcome.

14

A dividend in specie, as already suggested, sounds the simplest, followed by a DofV. They do not then have to be concerned about “gifts out of the company” or “consideration for the DofV”. The company declare a dividend whose value equals the agreed value of the car, grossed up by the amount of income tax the shareholder will have to pay on that dividend (and that grossed up amount will also be taxable), so the company transfers the car plus some cash to the shareholder.

That does assume sufficient reserves to declare such a dividend. If there are other shareholders of the same class, all would have to receive the relevant dividend, of course.

Are we talking about a “company car” worth £5k / £10k second hand? Or a Ferrari worth >£1m?

Paul Davidoff

15

Paul is right to draw attention to the available reserves position and the possible need for a pari passu distribution. We do not know the necessary facts here either.

There are ways possible round each:

  1. Share capital

It may be possible to reduce this and convert it into a distributable reserve: s.645 CA 2006 and para 3 SI 2008/1915

2 Pari passu

This can be avoided by an OSP of only the shares of the intending car purchaser. S.1033 is drafted in mandatory terms but CTM17570 indicates that HMRC think CGT treatment has to be claimed. It would be odd if they argued that Condition A or B applied when the taxpayer was against it!

If the shareholder is prepared to accept income tax or CGT this will not matter. There is a quirk in that where the person is not the original subscriber the CGT base cost may well exceed the original subscription price so that the taxable value of the distribution may exceed any capital gain.

Condition B may be difficult to achieve if the market value of the car is low compared to the market value of the entire holding. After the sale of the shares the seller may not have made a significant reduction in their holding or remain connected with the company.

A lopsided advantage of distribution treatment is that the company will not make a TOV per s.94(2)(a) IHTA. Neither party will make a TOV in the event of CGT treatment as long as the conditions in s.10 are fulfilled, particularly subsection(2), bearing in mind too that an arm’s length price may not be the same as open market value: SVM107119 and CGM14541-2. S.10 also needs to apply to the price of the car.

Jack Harper

16

My gut feeling is the car condition could muddy the waters a bit, even if everyone always intended it that way. I’d be extra careful not to assume the original family agreement automatically protects the tax outcome.

17

Tax advisers must not be gung-ho or fail to outline to their clients all, and I do mean all, the potential downsides of any tax planning, not least taking proper account of the particular client’s appetite for risk and for investing further resources to defend it.

But s.142 IHTA is a well-trodden path and what has been proposed by contributors to this thread is not provocative, indeed very low-key. Non-statutory formal clearance can be sought as early as possible in the 2 year period. HMRC’s only role is to give it or refuse (and drag their feet over a reply).

There is also no reason whatsoever that the variation cannot be made conditional upon their accepting that S.142 applies.
Then early submission in the 2 year period will allow replacement by another variation without there being a double attempt. HMRC have no standing to object to the drafting of a taxpayer’s document: their sole function is to determine whether the proffered document complies or not. They cannot be trusted of course—because a refusal of acceptance, however perverse and obtuse, is a formidable practical stumbling block. Especially if you are then stuck with a document as drafted, and the parties arguably cannot agree to revoke it and replace it without a double variation and its having a substantive legal effect however temporary.

If the car transfer is dealt with first by unexceptionable means and not conditional upon the later variation it is hard to see how it can be “consideration” for it. It is certainly not contractual consideration: not only is it past but it will be clear that it was given exclusively for the car. IOV2 will ask about consideration and clients can volunteer the details; others may prefer to rely on these not being relevant. It is for HMRC, upon full disclosure of all relevant facts, to demonstrate consideration not for the taxpayer to disprove it.

When in practice I never suggested to a client something I would not have been prepared to action on my own behalf. Here I would warn of the tax consequences of an unconditional variation if non-compliance has to be conceded.
There is a strong element of self-selection in the nexus between adviser and client. I had none who were shrinking violets or who expected me to wear brown trousers in my dealing with HMRC on their behalf. Chacun a son gout.

Pari Passu

Another way of avoiding this is for other shareholders to waive their entitlement to a dividend. For IHT s.15 IHTA helps though if done before the dividend is declared this provision is technically redundant.

Beware of TSEM4220-5. 4220 last paragraph gives the green light where the person who benefits is not a spouse or minor child. As 4105 states a settlement can include a transfer of assets but the transferred car will presumably not produce any income per 4107 which will be imputable to the settlor making the waiver. The SS is presumably not the spouse of the settlor or their minor child. If the total amount of the dividend is large enough it will be hard for HMRC to argue that the only amount actually paid is “enhanced” by the waivers. The recipient receives only what they are entitled to: it is inconceivable that they are indirectly in receipt of someone else’s. The mischief is where the actual recipient in fact receives the total dividend declared because all others waive.

I would not recommend, to get round, this alphabet shares with preferential rights. First, after the logic-defying perverse judgment in Vermilion in the SC these must not be newly-issued shares to avoid ERS. Secondly, it is procedurally over-elaborate. Thirdly, intentionally combined with the variation, it embodies an unnecessary triggering tweak likely to make the poor diddums at HMRC feel unsafe and cause them to lock themselves in the lavatory with the GAAR until mother comes to fetch them.

Jack Harper