It is not possible in the real world to sever an equitable joint tenancy retrospectively after a joint tenant of two has died. The entire equitable interest vests in the survivor by operation of law on that first death.
This may not be the true effect of the particular unseen DOV’s drafting but the OP description is ambiguous. The survivor must specifically transfer a half share of the entirety he owns in the real world to the trustees by the means of the instrument of variation and that transfer will not then not be a TOV for IHT if reading back applies. As long as the document does that a purported ineffective retrospective severance should be seen as Homer nodding and as merely superfluous wording.
Ss.4 and 5 IHTA create a fiction: that the taxable estate of a deceased is deemed to be the subject of a transfer of value made immediately before his death. At that vital fictional moment the deceased was actually, not fictionally, beneficially entitled to his severable share in the equitable joint tenancy.
S.142(1) by the words “ or otherwise” allow that share to be varied but only for IHT purposes: IHTM35071. What is to be varied, to be precise, is a “disposition” of property “comprised in his estate”. I hate to say that it is not easy to identify an operation of law as a disposition.
[The fictional s.4 TOV extends to GROB property fictionally included in the deceased’s estate by s.102 (3) FA 1986 but HMRC do not accept that it can be varied. It is not clear why. Plainly it is property that was not actually owned by the deceased but he is statutorily deemed to have been beneficially entitled to it at the above vital moment. It is no more barmy to vary its tax destination compared with some other logic- defying variations (see later) that HMRC gaily wave through. Admittedly the deceased could not have made a “disposition” of it although he could have made one of his severable share if he had actually severed it before death. IHTM vouchsafes no explanation.]
It is possible to vary a disposition of an asset contained in the s.5 estate, so forming part of the s.4 TOV, which at the time the variation is made no longer exists, or has been sold, or distributed to a beneficiary, and even if it may yet be sold in the course of due administration: s.142(6). Inexplicably, and courtesy of characteristic intellectual dishonesty, HMRC will not accept a variation of a life interest if the life tenant has died before the variation is made: IHTM35042 and 35044. Presumably therefore similarly a right of occupation that has terminated and was a QIIP. Most clients will prefer to concede these restrictive interpretations rather than tilt at a Windmill with deep pockets and a manic penchant for litigation.
The surviving joint tenant became entitled for property law purposes, including succession, to the entirety. He could make a simple gift of a share but that would be outside s.142 as a lifetime disposition. To come within s.142 he must make a real world transfer of it by the variation itself.
Even if he does that an open question is what happens when he dies? Do the words “this Act shall apply” permit his PRs to argue that as s.142 previously diverted a half share to AN Other that person now owns that share in his or her IHT estate and it then ceased to be comprised for IHT in the estate of the survivor?
Where the variation does change the disposition of property which has been already sold or distributed before the variation has been made, the sale proceeds or the property, as the case may be, will be beneficially owned in the real world by their real owner unless the variation itself also effects in law a substantive alteration of that real world entitlement. The property law owner must then cough up, must be a party to the variation, and will not make a TOV as long as reading back operates for IHT.
A surviving joint tenant can do the very same thing but a purported retrospective severance just on its own is a nullity. The drafting really matters. If that is not done you have to hope HMRC don’t notice or don’t take the point and that no one later challenges the validity of the variation i.e. those ultimately entitled to his estate. The survivor must use words of transfer to validly transfer a half share which s.142 reading back will then prevent from being a TOV.
So simply purporting to sever an equitable joint tenancy after death is as much of a legal nonsense as making a gift by Will of Buckingham Palace.
There might in such an unfortunate case be scope for scrutinising the history to determine whether there was in law a tenancy in common or a lifetime severance by conduct. Cogent evidence of a course of dealing must be unequivocal and not merely asserted: see Dunbabin [2002] EWHC 241 (Ch).
Jack Harper