Deed of Variation

I am dealing with a large estate which is subject to IHT. The deceased held various assets with St James Place, one of which was a Gift and Loan Trust. There is a loan repayable to the estate of approx. £80,000 and I am wondering if this can be waived by a Deed of Variation? If this is possible would this be treated as just an administration clause and would it be sensible to include a legacy as well?

Any thoughts would be appreciated. Thanks.

Sue Mullis
GoodyBurrett LLP

A deed of variation can only vary a disposition, i.e. a will provision, so the beneficiary of the residue may make a variation in favour of another beneficiary. That other beneficiary could be a trust, including the Loan trust, that owes the money to the estate so that the loan merges with the fund held for the beneficiaries of the trust which will have the same result as being written off. However, a deed of variation itself cannot “write off” or “waive” the loan.

Francesca Gandolfi
Canada Life

The query states that t he deceased held various assets with
St James Place, one of which was a Gift and Loan Trust. Presumably, however, the trust was held by the trustees and the trust assets did not form part of the deceased’s estate.

We are then told that there is a loan repayable to the estate
of approx. £80,000. Much depends on the terms of the loan agreement but, presumably, this does not contain any automatic repayment clause on the death of the lender. It seems more likely that the loan is repayable on demand and, presumably, one or more beneficiaries
of the estate has inherited the outstanding balance. It will therefore be up to them whether or not to demand repayment, either in whole or in part.

What would be the effect of waiving the outstanding balance
by means of a deed of variation? If all the usual niceties are observed, this would be treated as a transfer of value from the deceased which, depending on the terms of the trust, is likely to be a chargeable transfer, resulting in an increased IHT liability
on the estate. An alternative might be for whoever has inherited the outstanding balance to waive it. To be effective, this would need to be achieved by a formal deed, although not a deed of variation. This would be a transfer of value but, presumably,
it would be within the transferor’s available nil rate band and out of account if the transferor survives for seven years.

It should be borne in mind that the above analysis may turn out to be incorrect if any of my assumptions is incorrect.

Paul Thompson

Canada Life

Executors are not able to write off the loan.

Similarly, a DoV cannot waive or write-off the loan.

In the absence of any specific provision in the deceased’s will as to who is to benefit from the loan repayment (e.g. a surviving spouse) then it will (subject to the need for expense payments etc) fall into residue. In which case the residuary beneficiary could execute a DoV.

If the residuary beneficiary, for example, executes the DoV in favour of the trustees of the loan trust this would in effect write off the loan.

Malcolm Finney

If the residuary beneficiary passed the benefit of the loan to the trust by a DOV, as has been suggested, would that be treated as “consideration” (for the purposes of deciding whether a chargeable event has occurred) if the trustees then assigned the bond out of the trust to the same beneficiary? DOV’s do not read back for income tax purposes.

**Diana Smart
**Gordons LLP

If I understand Diana’s comments correctly I do not believe that on an assignment by the trustees of the single premium bond out to the residuary beneficiary (post the DoV) gives rise to a chargeable event.

For a chargeable event to arise consideration needs to be provided in money or money’s worth by the assignee (i.e. the residuary beneficiary). The DoV simply re-directs the benefit of the loan to the trustees. I would suggest that this does not constitute the provision of money or money’s worth in exchange for an assignment of the bond.

I can’t cite any particular authority; just my view !

Malcolm Finney

Couldn’t there be a consideration from the beneficiary to the trustees in some circumstances, though? What if the beneficiary said to the trustees that he was prepared to waive the loan provided that the trustees assigned
the investment bond to him? That would seem to be a consideration in money or money’s worth. If that is the case, it should be noted that the chargeable gain would be based on the amount of the consideration (s493(5) ITTOIA 2005) rather than the surrender
value, unless they were connected persons (s493(6)). It would also result in the policy being brought within the CGT regime (s210(3) TCGA 1992).

However, is this what would happen in practice? Let’s say that the residuary beneficiary of the estate decided to demand repayment of the outstanding balance of loan. If the residuary beneficiary of the estate were to be the same person as the beneficiary
of the gift & loan trust in whose favour the trustees were minded to exercise their discretion (clearly, this will not always be the case), couldn’t the trustees kill two birds with one stone by assigning the investment bond to that person? The trustees would
simply be discharging their obligations under the terms of the loan agreement. That would involve no consideration in money or money’s worth being provided by the beneficiary.

Or would it?

Paul Thompson

Canada Life

Wouldn’t the beneficiary who has inherited this asset - the debt due from the trustees - become a settlor of the trust, to the extent of any amount waived? The gift would be a chargeable transfer, and if he/she is a potential beneficiary of that that trust, there would be a GROB issue.

Ray Magill

If the residuary beneficiary inheriting the loan rights executes a DoV in favour of the loan trust trustees the settlor is deemed to be the deceased not the beneficiary in which case there can be no GWR assuming reading back.

Malcolm Finney

My experience is that St James’s Place have particular requirements when dealing with a Gift & Loan Trust. I have a useful guide from them if you would like me to send it to you.

Jane Whitfield
Barrett & Co

RJV: Please send Ms Whitfield a direct message if you would like the guide.