I have been instructed to prepare a deed of variation by two beneficiaries of an estate. A gift of a rental property is being varied from one beneficiary to another. However, the beneficiaries have agreed between them that the rental income accrued up until the date of the DOV should be split 50/50.
I understand that Deeds of Variation are not retrospective for Income Tax purposes, and should not be made for consideration in money or money’s worth, and so I am wondering whether or not any provision can be written into the DOV in respect of how the rental income is dealt with.
The rental income accrued prior to the date of any deed of variation (from date of death) on a specific gift is subject to income tax on the part of the donor and thus normally such income does not pass under the DoV.
However, there is nothing to prevent the donor under the DoV passing over to the donee the net amount of rental income for the period (ie gross less donor’s income tax liability) or some percentage thereof.
My concern is that as the Deed of Variation is conditional upon the agreement in respect of rental income going ahead, is that this could be classed as ‘consideration’ thus making the Deed of Variation void.
IHTA 1984 s142 requires that the donor receives no extraneous consideration in return for entering into the DoV.
The beneficiary (B) of the rental property under the will is entering into the DoV. B is entitled to all rental income accrued between date of death and date of DoV. B may decide to pass over, in addition, 50% of rental income accrued over this period; if the 50% is 50% of gross rental income B must discharge any income tax liability thereon. Alternatively, B may pass over 50% of gross less any income tax liability thereon.
Not quite sure who is providing any extraneous consideration?
Provided that the variation deals with both elements of the intended gift - the property and half of the income up to the date of the deed, like Malcolm, I cannot see that there is any “consideration” involved which might impact the effectiveness of the variation.
Similarly, if despite having agreed to gift the property, there are ongoing discussions as to how the rents, etc. might be dealt with, it would be possible to use 2 variations – the first dealing with ownership of the property, and the second dealing with the sharing of the pre-variation income. However, the tidiest solution would be to include all in the one deed.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals