Deed of Variation without reference to legislation

Dear Members

Mrs A died in 2018 and her husband Mr A (an accountant) drafted a Deed of Variation to pass his share of a property (held as tenants in common) his share worth £700,000 to his son.

The Deed of Variation states that it is intended to take effect for IHT and CGT but makes no reference to the actual legislation.

Mr A has now died having never having actually transferred the property to his son and it has gone up in price. The house is still resgisterd in the names of Mr and Mrs A

Given the following
if the deed of variation is to be effective for inheritance tax and capital gains tax then it should refer to section 142 of the Inheritance Tax Act 1984 and section 62 of the Taxation of Chargeable Gains Act 1992 as amended by Finance Act 2002, section 120 and/or section 52

Whether or not the Deed is effective will undoubtedly affect the IHT position. This only states 'should refer’.

Is the Deed valid for IHT and CGT in accordance with the Acts despite no reference being made to them specifically?

I believe there is an advantage to the Deed being valid and an implied trust of the property in favour of the son, as the IHT will be assessed on the DOD value of Mrs A (plus interest) rather than the current value in the estate of Mr A

It is a bit of a mess and if any members have thoughts to share, I would be most grateful

Joanne Orbell

For IHT, s.142(2) IHTA 1984 states:

Subsection (1) above shall not apply to a variation unless the instrument contains a statement, made by all the relevant persons, to the effect that they intend the subsection to apply to the variation.

For CGT, s.62(7) TCGA 1992 states:

Subsection (6) above does not apply to a variation unless the instrument contains a statement by the persons making the instrument to the effect that they intend the subsection to apply to the variation.

As both require a statement that the relevant sub-section apply to the variation, the failure to specifically include reference to s.142(1) IHTA 1984 or s.62(6) TCGA 1992 within the declarations could be fatal to the variation’s effectiveness.

Having said that, many variations refer to s.142 IHTA 1984, rather than subsection (1) as required by the specific terms of subsection (2), but are accepted as valid by HMRC. Accordingly, it might be argued that HMRC accepts some element of flexibility. However a failure to refer to the required sub-sections may be stretching such flexibility too far.

In the meantime, I find it a little odd that a variation referencing only s.62 TCGA 1992 (as referred to in the initial post) should be accepted, mindful that s.62 applies to an estate in any event – s.62(4) would be an odd provision for personal representatives to have to elect into! It is only the provisions of s.62(6) that apply to cause the beneficiaries of a variation to be treated as “legatees” for the purpose of s.62. I vaguely recall a discussion with a senior person at HMRC IHT that reference merely to s.62 was not enough in itself.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

“Should refer” is English for “Must refer”

In the circumstances you describe, if the DOV is effective, Mr A’s share of the property (not Mrs A’s unless I misunderstand you) will operate as a gift by Mr A to his son. IHT will be assessed on the DOD value of Mrs A’s share at the date of HER death, PLUS the value transferred by the DOV.

Julian Cohen

Simons Rodkin

Dear Members

Mrs A died in 2018 and her husband Mr A (an accountant) drafted a Deed of Variation to pass his share of a property (held as tenants in common) his share worth £700,000 to his son.

The Deed of Variation states that it is intended to take effect for IHT and CGT but makes no reference to the actual legislation.

Mr A has now died having never having actually transferred the property to his son and it has gone up in price. The house is still resgisterd in the names of Mr and Mrs A

Given the following
if the deed of variation is to be effective for inheritance tax and capital gains tax then it should refer to section 142 of the Inheritance Tax Act 1984 and section 62 of the Taxation of Chargeable Gains Act 1992 as amended by Finance Act 2002, section 120 and/or section 52

Whether or not the Deed is effective will undoubtedly affect the IHT position. This only states 'should refer’.

Is the Deed valid for IHT and CGT in accordance with the Acts despite no reference being made to them specifically?

I believe there is an advantage to the Deed being valid and an implied trust of the property in favour of the son, as the IHT will be assessed on the DOD value of Mrs A (plus interest) rather than the current value in the estate of Mr A

It is a bit of a mess and if any members have thoughts to share, I would be most grateful

Joanne Orbell

Mrs A’s estate passed to her husband Mr A. He then varied the terms of Mrs A’s Will using this somewhat dubious DOV to pass his share of the property to his Son. It was never actually transferred into the joint names of him and his son but remained in the name of Mr A and his deceased wife. Mr A has now died and his half is passing to the son under his Will.

As the value under the Deed of Variation was £700,000 it exceeded the NRB available at the time to Mrs A’s estate. If the DOV is effective then this created an IHT liability and interest and penalties will have accrued. If the Deed of Variation is ineffective for IHT and CGT write back then either it is a gift from Mr A to his son or the property stayed with Mr A and now passes in total to the son under his Will. The estate of Mr A will suffer IHT as it exceeds the available NRBs and RNRBs. It is a calculation as to which scenario will create the worst outcome for IHT and CGT. The issues are:

  1. is the deed valid for IHT and CGT write back so the gift is from the estate of Mrs A and subject to IHT and fines as it exceeded the NRB available at Mrs A’s death?
  2. If invalid for write back due to no reference to legislation then does it serve as a Deed of gift to the son and potentially create a failed PET on Mr A’s estate and CGT as it might have increased in value given the Deed of Variation was just within the 2 years of Mrs A’s Death. There is also a potential gift with reservation of Benefit in this case, which I won’t go into at this point.
  3. If the DOV is void and no property has actually transferred to the son then it all passes under Mr A’s estate to the son now. The most simple outcome.

I believe this is one for Council’s opinion.

I agree with your final observation – that counsel’s opinion is probably the most appropriate way forward, mindful of the potential tax liabilities in question.

Whilst I doubt that the variation is effective for IHT and CGT purposes, it may well be effective to have made a gift of the subject matter to the son. If Mr A was the personal representative of his late wife, then the gift may have been completed when the deed was executed. I believe this would also apply to any property which passed to Mr A by survivorship.

If, however, the PR was a third party, there may be an argument that the gift of any property passing into the estate could not be complete without the PR receiving notice of the variation. This might fall down though if such property was subsequently assented to Mr A.

Lincoln’s Inn beckons!

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

Yes indeed . I thank you both for your thoughts. Have a good weekend

I agree with Paul’s most recent comment to the effect that it sounds as though the deed may well be effective to make a gift, but ineffective in getting the tax advantage. But all is not lost, because it may be possible to rectify the deed or have it set aside for mistake.

Josh Lewison
Radcliffe Chambers

1 Like

Thank you Josh. Rectification was something I had not considered

It seems strange that this issue hasn’t (as far as I am aware) cropped up before. I supppose it demonstrates how non-lawyers should not draft legal documents !!

My take is that the lack of explicit references to IHTA 1984 s142(2) and TCGA 1992 s62(6) (must include the subsection references) I would suggest are fatal to the success of the relevant “reading back” for IHT and CGT. In today’s climate I can’t see HMRC adopting a favourable interpretation of s142.

The failure to succeed in “reading back” under s142 does not necessarily mean the beneficial interest in the property does not pass from father to son pursuant to the terms of the deed. Prior to completion of the administration of the estate father possesses no beneficial interest in the property (unless the PRs assented the property to father earlier in the administration). On assent by the PRs to father the beneficial interest in the property would then pass to the son (pursuant to the deed).

For CGT, the disposal occurs at the date of assent not the date of the deed?

For IHT, father has made a PET to son, again, at the date of assent?

Malcolm Finney

Yes the death was within 7 years so the PET would fail alough as it was over the NRB, taper relief would be applied. Thanks to everyone who responded