Deed of Variation in favour of a deceased beneficiary

This is a Husband and Wife situation.

H made a Will leaving his estate to the two children in equal shares. W was living in a care home and had her own funds.

H died first leaving an estate in excess of the NRB and IHT has been paid.

W died a year later leaving a Will in which everything passes to the same two children in equal shares. There is no tax to pay on W’s death as it is well within the NRB.

H died less than 2 years ago. Can the children re-direct their entitlement from H’s estate to W and claim the spouse exemption?

This would avoid the tax payable on the first death, albeit that the ultimate destination of the assets does not change (as the children inherit either way).

I am having a bit of a brain freeze on this and any comments to clear the fog would be much appreciated.

Steve Carter
Setfords Solicitors

Whilst, in the past, HMRC has accepted a variation in favour of the spouse who survived the deceased, but died before the date of the variation, I do not know if that is still acceptable.

Certainly, HMRC will refuse to accept a variation where the intended beneficiary died before the deceased. However, if the intended beneficiary survived the deceased, the argument is that as the variation is deemed to have had effect for IHT purposes as at the date of death of the deceased it should be effective.

I see no reason why the situation might not be tested, provided the beneficiaries of the estates are properly aware that the outcome cannot be guaranteed.

As the intended beneficiary will have died, careful consideration should be given to how the variation is worded - although the deemed disposition will be to them, as they have died the “real world” gift will need to be to their personal representatives.

Paul Saunders

Thank you Paul. In my experience, HMRC does not usually frown upon variations that do nothing more than make use of the nil rate bands available to a married couple where the deaths have occurred close together. In this instance, I think it is a case of ‘nothing ventured, nothing gained’ so we will see what they say.

I cannot see a particular issue with the wording of the variation. If the disposition in the Deed is to the surviving spouse (who is now deceased) then it follows that payment of the gift will be to her PRs. Am I missing a nuance you have in mind?

Steve Carter
Setfords Solicitors

With regard to the wording to be used I a variation deed of variation is a deed of gift which, provided it contains appropriate declarations, is deemed to have retrospective effect for IHT and some CGT purposes only. For all other purposes, it can only be effective from its own date (applying Waddington v. O’Callaghan).

Under normal circumstances, a gift to a deceased person has no effect. A gift to that person’s personal representatives (PRs), without more, raises the question as to whether it is a gift to them personally or for the benefit of the deceased’s estate, and the uncertainty can raise doubt as to the effectiveness of such a gift.

Whilst, for IHT purposes, a deed might make the gift to the now deceased widow but, as she is dead, can that gift take effect in law? However, if the gift is made to the widow’s PRs can spouse relief be claimed as the gift is not to the widow?

HMRC has questioned variations that merely purport to benefit a now deceased surviving spouse, as have other professionals. If HMRC has adopted a more relaxed view of the wording of a variation in these circumstances, then that may be helpful. Having said that, HMRC has accepted deeds of variation the terms of which do not make sense in the “real world”, or which are a clear breach of trust and, when questioned, have fallen back on the argument that HMRC does not give legal advice and is merely looking at the IHT question! It is for this reason that I suggest careful consideration of the wording - to ensure that the wording of the deed can give effect to the intended transaction itself and not just to satisfy HMRC’s requirements.

Paul Saunders

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This may be a case where a fictional replacement Will would work better, rather than drafting it as a gift to the now deceased spouse.

Simon Northcott

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