We have a complex situation here at the moment, where Grandfather A died with a will leaving legacies to his daughters and residue to his son, B. There is IHT payable and B will inherit, let’s say, £1m.
Within a year of A’s death, B dies intestate unexpectedly. He is unmarried and leaves 6 children, 5 adults and 1 minor. The only asset in B’s estate is the £1m inheritance from A, so Quick Succession relief will apply, meaning 80% relief, but this still leaves 20% IHT payable on B’s death that can be avoided if a Deed of Variation is made within 2 years of A’s death directing B’s inheritance to his children. The two year deadline expires in September, so some urgency is needed. No grant has yet been applied for in B’s estate because it is not possible to raise the IHT that would be payable.
We know a Deed of Variation can be prepared by B’s PR’s within two years of the date of A’s death, which will divert B’s inheritance to his children so they will effectively inherit direct from A and therefore there will be no need to claim Quick succession relief, thereby saving roughly £80k in IHT. However, we are also aware that their authority to act as PR’s derives from the date of the Grant and not the date of death, so they don’t actually have the legal authority to deal with the estate at the moment.
Can anyone suggest a course of action that will enable us to be able to prepare a valid Deed of Variation in this instance please?
In the absence of an administrator, B’s children could perhaps execute a DoV on the basis that they can deal with their interest in B’s unadministered estate. That’s fine as far as the adults go. The position of the minor may be more difficult depending on how old they are. Contracts made by minors are voidable until ratified as an adult, not void, meaning that a DoV might well work.
If B’s children follow Josh’s suggestion, I wonder if s.142(3) would apply should they execute a separate variation by which the minor beneficiary of B’s estate is given a sum equal to a 25% share of A’s estate in priority to the distribution of residue in B’s estate?
Whilst arguable that there is consideration as the first variation might not be made if the second variation was not in contemplation, the minor is not a party to either variation and could not, therefore, cannot be providing consideration. The parties to the variations are giving away benefit, not exchanging one entitlement for another.
There is, of course, the risk that HMRC reject the IHT effect of the first deed and the adult beneficiaries still have to comply with the terms of the second variation.
I would be interested to know if any other members of this forum feel that such an arrangement might have legs
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Many thanks Patrick, Paul and Josh for your replies.
Patrick and Josh, they were my main thoughts.
Paul, if I am understanding this correctly, I think you are saying that the adult beneficiaries of B’s estate prepare a DOV in A’s estate giving a cash sum of approximately £160,000 to the minor, which is roughly equivalent to a 1/6th share of the net residue after QSR has been applied, and then the residue to the 5 adult beneficiaries? (I’m assuming the 25% was a typo as there are 6 beneficiaries, not 4. Incidentally, I put £80k as the potential IHT but actually it’s only £40k).
Does that have to be a separate variation or can it be in the one Deed? And bearing in mind there will be no appointed PR of B’s estate before the Deed is made as the Grant of Letters of Administration won’t be issued, will it still be ok for the Deed of Variation to be made by the beneficiaries only and not the PR’s (even though any 2 of the 5 beneficiaries will be acting in that capacity at some point)? Is this the reason you mentioned that HMRC could reject the IHT effect?
Or have I completely misunderstood your suggestion?
I do not believe that a single variation affecting the dispositions in 2 estates is necessarily within s.142, and would be reluctant to suggest it. My suggestion was for the adult beneficiaries to make a variation of 5/6th of the first estate and a separate variation of the second estate to ensure the minor beneficiary suffers no detriment by purportedly carving out a prior gift to the minor equal (or greater) in value to a 1/6th share of the distributable value of the first estate. Whatever happens, the variation of the second estate should not change the shares in which the “residue” of the estate is divided – i.e. it should remain the 6 shares, rather than be reduced to 5.
As Patrick suggests, it might be appropriate to have the assistance of counsel – possibly Mr Lewison(?) – in order to fashion an effective arrangement.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals