Deed of variation of intestate estate

I would be grateful for a pointer to a basic template/precedent for varying an intestacy. In this case I have a non dom death whose UK estate is substantially immovable property in E&W and have the court’s leave to apply as if the deceased died domiciled in E&W, the widow making the application; the children, all living in the same overseas country as the widow (Iran) are content to give their 50% share of the excess above the statutory legacy to mum; (they know that they cannot enter into any other arrangement that entails reversing the gift i.e. that it is not a legitimate device to avoid IHT. They genuinely want mum to have it all). I’d planned to draft to the effect that the children waive their right in favour of the widow to the intent that the devolution of the E&W estate should be on the basis that the deceased died leaving a widow but with no children either by the widow or otherwise, but there may well be a better way of dealing with it. Also, noting the discussion about CGT, and reading back or not, as preferred, I am not clear about whether or not to exclude reading back for CGT purposes; the death occurred nearly two years ago in February 2020 and the properties will have increased in value over the date of death values in that two year period. I’m assuming that I can ignore the idea of annual exemption from CGT as regards the beneficiaries because they wouldn’t have such allowances. Any comments about this would be gratefully received.

I will attempt to comment on the CGT issues.

Any DoV is to be executed by the children in favour of mother. All are non-UK domiciled for all tax purposes.

The immovable property is, for CGT, up-lifted to market value at the date of death. Since then it appears the property has increased in value.

I assume all parties are non-UK resident (and non-UK domiciled) and thus the remittance basis is irrelevant (ie in any event remittance basis can’t be claimed as children and mother are non-UK resident). Nevertheless, despite non-UK residence, any CG arising on a disposal of UK situs immovable property falls within a CGT charge. There is, however, no loss of the annual CGT exempt amount for non-UK resident individuals.

If election for reading-back for CGT is made, then the mother will acquire the childrens’ interests at their probate value and with it the unrealised post death CG. But no immediate CGT charge arises.

If election for reading-back for CGT is not made, then the mother will acquire the childrens’ interests at their market value. This will mean that the post death CG will be precipitated on the part of the children when the DoVs are executed. But, on the other hand, mother acquires the re-directed interests at market value thus mitigating any CG on a future sale.

Depending upon how many children are involved and the figures, any CG precipitated by not reading-back could be reduced significantly (or possible to nil) which could tip the balance in favour of no-reading back.

Malcolm Finney

Malcolm, that is so helpful and clearly put. Just one thing, as I’m not at all confident about any extrapolation I make, and need to put it in my own words

If not read back, then - ?

Does mother take at the mv at the date of the DOV and have that higher value as acquisition cost for her subsequent disposal?

Do the 5 children share the CGT on disposal at the DOV date, if at a gain over probate values, and have 5 x £12,300 to apply against the gain?

If read back - ?

Mother takes the properties at probate value and bears the tax liability on the gain over that value on sale, with only one x £12,300?

The children have no liability having disposed of the properties at their acquisition value i.e., probate value?

As an aside, but pertinent to our case, I did not appreciate that the CGT allowance is different from the income tax personal allowance for whether or not a non-resident has the benefit of it. Another aspect in this case relates to lifetime tax liabilities in respect of the UK rents arising on the properties and we understand that the non res deceased would not have had the personal allowance each year in view of the lack of treaty or reciprocity between UK and Iran.

I’d appreciate your further confirmation comments, if you would be so kind.

David Martin

It needs to be remembered that a deed of variation is effective for the purposes of UK tax only and there can be no guarantee that the taxing authorities of another jurisdiction will treat the dispositions under the variation in the same way.

Before executing the variation, the widow and children should seek advice in their own jurisdiction to understand the effect of the variation under the tax code applicable to them.

I am aware of a number of situations where, whilst reducing the UK tax liability, a variation by non-UK individuals has resulted in non-UK taxes exceeding the UK tax “saving”.

Paul Saunders FCIB TEP

Independent Trust Consultant

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Salutary lesson: I shall remember to tell them to take advice etc. and thank you for pointing this out, Paul

David Martin

Malcolm, that is so helpful and clearly put. Just one thing, as I’m not at all confident about any extrapolation I make, and need to put it in my own words

If not read back, then - ?

Does mother take at the mv at the date of the DOV and have that higher value as acquisition cost for her subsequent disposal?

YES IF NO READING BACK FOR CGT

Do the 5 children share the CGT on disposal at the DOV date, if at a gain over probate values, and have 5 x £12,300 to apply against the gain?

I ASSUME EACH CHILD WILL RE-DIRECT THEIR OWN INHERITANCE TO MOTHER SO EACH CHILD WILL MAKE A SEPARATE DISPOSAL WITH EACH HAVING THEIR OWN CG AND THUS THEIR OWN CGT CHARGE AND THEIR OWN ANNUAL EXEMPTION.

If read back - ?

Mother takes the properties at probate value and bears the tax liability on the gain over that value on sale, with only one x £12,300?

CORRECT.

The children have no liability having disposed of the properties at their acquisition value i.e., probate value?

CORECT.

As an aside, but pertinent to our case, I did not appreciate that the CGT allowance is different from the income tax personal allowance for whether or not a non-resident has the benefit of it. Another aspect in this case relates to lifetime tax liabilities in respect of the UK rents arising on the properties and we understand that the non res deceased would not have had the personal allowance each year in view of the lack of treaty or reciprocity between UK and Iran.

THE PERSONAL ALLOWANCE IS AVAILABLE ONLY TO UK RESIDENTS UNLESS EXTENDED TO A NON-UK RESIDENT UNDER A UK DTA [ITA 2007 s56].
THE CGT ANNUAL EXEMPT AMOUNT IS DIFFERENT. SEE MY ORIGINAL COMMENTS RE THIS AMOUNT [TCGA 1992 Sch 1 para1K].

RENTAL INCOME ARISING ON UK REAL ESTATE TO A NON-UK RESIDENT IS ALWAYS SUBJECT TO UK INCOME TAX EVEN AT HIGHER RATES WHERE IN POINT; NO UK DTA REMOVES THIS CHARGE.
IN CALCULATING ANY UK INCOME TAX CHARGE ON THE UK SOURCE RENTAL INCOME ACCRUING TO AN INDIVIDUAL RESIDENT IN IRAN SUCH INDIVIDUAL IS NOT ENTITLED UNDER UK TAX DOMESTIC LAW TO A PERSONAL ALLOWANCE NOR IS THERE ANY ENTITLEMENT UNDER ANY DTA AS THERE IS NO NO DTA BETWEEN THE UK AND IRAN.

PAUL MAKES A VALID POINT THAT A DoV IS IN ESSENCE A UK TAX CONCEPT AND MAY BE MEANINGLESS OUTSIDE THE UK WHETHER FOR OVERSEAS TAX OR NON TAX PURPOSES (eg so-called "forced heirship).

Malcolm Finney

Again, thank you very much for thorough re‎plies. A lot of very useful information. I must make it clear in the DOV that the disposals are, as it were, several ie separate‎ by each child even though they all dispose in the same deed.

It’s going to be interesting.

Yours sincerely

David Martin
‎W Legal



From: malcfinney1 via The Trusts Discussion Forum
Sent: Thursday, 2 December 2021 20:32
To: David Martin
Reply To: The Trusts Discussion Forum
Subject: [The Trusts Discussion Forum] Deed of variation of intestate estate

Malcolm, that is so helpful and clearly put. Just one thing, as I’m not at all confident about any extrapolation I make, and need to put it in my own words

If not read back, then - ?

Does mother take at the mv at the date of the DOV and have that higher value as acquisition cost for her subsequent disposal?

YES IF NO READING BACK FOR CGT

Do the 5 children share the CGT on disposal at the DOV date, if at a gain over probate values, and have 5 x £12,300 to apply against the gain?

I ASSUME EACH CHILD WILL RE-DIRECT THEIR OWN INHERITANCE TO MOTHER SO EACH CHILD WILL MAKE A SEPARATE DISPOSAL WITH EACH HAVING THEIR OWN CG AND THUS THEIR OWN CGT CHARGE AND THEIR OWN ANNUAL EXEMPTION.

If read back - ?

Mother takes the properties at probate value and bears the tax liability on the gain over that value on sale, with only one x £12,300?

CORRECT.

The children have no liability having disposed of the properties at their acquisition value i.e., probate value?

CORECT.

As an aside, but pertinent to our case, I did not appreciate that the CGT allowance is different from the income tax personal allowance for whether or not a non-resident has the benefit of it. Another aspect in this case relates to lifetime tax liabilities in respect of the UK rents arising on the properties and we understand that the non res deceased would not have had the personal allowance each year in view of the lack of treaty or reciprocity between UK and Iran.

THE PERSONAL ALLOWANCE IS AVAILABLE ONLY TO UK RESIDENTS UNLESS EXTENDED TO A NON-UK RESIDENT UNDER A UK DTA [ITA 2007 s56].
THE CGT ANNUAL EXEMPT AMOUNT IS DIFFERENT. SEE MY ORIGINAL COMMENTS RE THIS AMOUNT [TCGA 1992 Sch 1 para1K].

RENTAL INCOME ARISING ON UK REAL ESTATE TO A NON-UK RESIDENT IS ALWAYS SUBJECT TO UK INCOME TAX EVEN AT HIGHER RATES WHERE IN POINT; NO UK DTA REMOVES THIS CHARGE.
IN CALCULATING ANY UK INCOME TAX CHARGE ON THE UK SOURCE RENTAL INCOME ACCRUING TO AN INDIVIDUAL RESIDENT IN IRAN SUCH INDIVIDUAL IS NOT ENTITLED UNDER UK TAX DOMESTIC LAW TO A PERSONAL ALLOWANCE NOR IS THERE ANY ENTITLEMENT UNDER ANY DTA AS THERE IS NO NO DTA BETWEEN THE UK AND IRAN.

PAUL MAKES A VALID POINT THAT A DoV IS IN ESSENCE A UK TAX CONCEPT AND MAY BE MEANINGLESS OUTSIDE THE UK WHETHER FOR OVERSEAS TAX OR NON TAX PURPOSES (eg so-called "forced heirship).

Malcolm Finney


Previous Replies
Salutary lesson: I shall remember to tell them to take advice etc. and thank you for pointing this out, Paul

David Martin

Out of interest, if you were not to read back the CGT, and claimed the annual exemption by all of the children, would you need to draft a deed of appropriation, and then a DOV? Or would it just be assumed that the assets were appropriated, and no deed required?

Thank you, Christina – strangely, the same question occurred to me last night. It’s an added complication. I assume you’re raising this point because we need to be able to demonstrate to HMRC that what was being dealt with was not needed for the period of administration, but in the intestacy situation, it’s the whole estate net of debts at death (including a lifetime tax debt that we are working on computing).

We don’t have a grant yet, so there is no one formally able to appropriate. I suppose we could argue that the shares in the intestacy are fixed by law and the default position is that they all own the estate in the statutory proportions; the children would presumably only be disposing of their proportion of the value of the estate – i.e., what is left after taking out the widow’s statutory legacy and half what is left. In this case and assuming that that is the correct treatment, i.e., just a proportion of the increase in value over the period accrues to the children and would therefore be taxable on them when varying in favour of mother, that cuts the value being disposed of by the children down to about a quarter of the net value of the estate after deducting debts and implicitly ignoring IHT since it won’t be payable. In practice, all this turns on what the gain would be between the date of death 22 months ago and now.

I don’t know the answer. If this helps anyone make a further suggestion or comment, I would be obliged.

David Martin

Hi Daniel

I wondered because if you are completing a DOV and not reading back the CGT, then in order to gain the most benefit from all of the beneficiaries’ CGT annual allowances, you would often complete a Deed of Appointment appointing shares to be held by the beneficiaries on bare trust, whilst retaining a share within the estate too, to use everybody’s CGT annual exemptions. If the reading back were not drafted into the DOV, then there is a disposal for CGT purposes, when the mother takes. If the asset were then disposed of in the future, her CGT liability is hedged on the value of the assets on the date of the DOV. Whereas the children’s CGT is for gains between the date of death and date of the DOV. I would assume a Deed of Appropriation is required regardless of the completion of the DOV, and just wondered what others points of view were on this as no-one had mentioned it. I am following with interest :blush:

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Thank you very much, Christina, and I agree all you say but, in my case, (1) there is an intestacy and (2) we don’t have a grant yet and will not get one before the 2nd anniversary – 5 2 22.

So: can all the beneficiaries under the law of intestacy in E&W enter into a DOV now, before a grant and thus before any of the above happens/is possible, ie before there is anyone empowered to exercise the power of appropriation to beneficiaries in respect of assets no longer required in the administration. I assume that they can. If you think otherwise, please let me know.

If that is right, then there must be a way of justifying the use of a number of annual allowances against the gain arising on the date of the DOV? Or is that not the case and in effect, no advantage can be taken of the multi annual allowances of the beneficiaries who dispose at the DOV date.

These are my concerns in this particular case, of course. Other points may arise in other circumstances.

DAVID

Hi Daniel

Yes you can complete a DOV before having probate. The issue you will have is calculating how the appropriation should work if you’re not that far along in the administration process, as naturally in these circumstances, I guess you will want to deal with the appropriation before the DOV.

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Personally, I would be wary of omitting the CGT declaration in a variation where the assets subject to the variation are still within the unadministered estate.

A beneficiary’s entitlement to the unadministered estate is a chose in action. If any part of this is gifted by the beneficiary, there is a disposal for CGT purposes with a nil acquisition value. There is judicial support for this, although I have not been able to trace the case reference (Court of Appeal or House of Lords I recall) Accordingly, the beneficiary making the variation could be assessed to CGT on the value of their entitlement that has been gifted as at that date of the gift (i.e. the date of the variation). Whilst I am not aware that HMRC has taken this point in recent years, that does not mean that it might not be taken in an “appropriate case”.

Once assets have been distributed to the original beneficiary, the chose in action argument no longer applies to those assets.

Turning to the question of whether a beneficiary under intestacy can enter into a variation before a grant is issued, provided that there entitlement is certain (which should be the case unless they are a minor) there is no reason they cannot validly gift all or any part of such entitlement by a variation. Their entitlement vets immediately upon death and is independent of the issue (or otherwise) of a grant of representation to the estate.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

My understanding is that HMRC have not in the past adopted, nor currently adopt, the analysis raised by Paul regarding the chose in action matter based on their CGTM despite its possible correctness.

Not sure of the case Paul is referring to unless its the HoL decision in Marshall v Kerr?

Malcolm Finney

I agree with Paul and seem to recall that in my dim and murky past the omission of a s62(6) election in a deed variation in an unadministered estate caused some real concerns and correspondence regarding ( following advice from Inland Revenue? ) adverse CGT consequences.

.Perhaps the case is Zim Properties Ltd v Proctor [1985] BTC 42 referred to in the advice in Croner i navigate 367 -925