Deed of Variation and Promissory Note

Prior to introduction of TNRB W dies and H enters into DofV to preserve part of W’s NRB.

He elects to vary W’s Will to provide for circa £200k to pass to children. However only £50k actually passes to children with the balance being supported by a Promissory Note. Over 7 years later H dies having never paid the balance of the Promissory Note to children.

Does the Promissory Note constitute consideration as H has had the benefit of the funds? If so does this invalidate the whole DofV rendering the £50k to be PETS from H?

Any thoughts??

Kathy Melkerts

The answer may depend on the reason why the debt was left outstanding for so long.

I have previously discussed with HMRC, Inheritance Tax situations where NRB gifts have been created by IoV, but which have not been satisfied within the 2 year window under s.142 IHTA. The response has generally started with the comment why bother to enter into a variation and not carry it through? There is therefore an implicit suggestion that HMRC might allow the benefit of the doubt. If satisfaction of the gift was, say, subject to a sale of the former matrimonial home, for which was proving difficult to find a buyer, this was considered an adequate reason for a significant delay for non-payment.

If in the instance in question, there is no particular reason for the delay in payment, I wonder if the situation is, in reality, any different to where the balance was left outstanding and secured on the former matrimonial home, which seems to be acceptable to HMRC regardless of the other assets held by the beneficiary making the variation. After all, a promissory note should be enforceable against the (now deceased) beneficiary during their lifetime.

My thought is that you should include the debt under the promissory note as a liability of the estate and, if you remain concerned that HMRC might refuse to allow it, either detail the background in a note when submitting the IHT400, or ensure you have a detailed note with your views on file, which can be copied to HMRC if the debt is questioned. However, if, upon reconsideration, you feel there is no doubt the debt is allowable, why would you go to the time and trouble to produce such a note (so perhaps a potential Catch 22 to be wary of).

Paul Saunders