Suppose under a deceased’s will he leaves his estate worth £1m equally between his son and daughter. The estate incudes a house worth £600,000. The daughter wants the house and is happy to pay her brother £100,000 to even things up between them. It has been suggested to me by those whose opinion I revere that they can do a deed of variation under s. 142 IHTA 1984 treating the will as if it had provided (1) for a specific bequest of the house to the daughter subject to her paying the son £100,000 and (2) leaving residue to the son alone. But I’m still struggling to see how that avoids being caught by s. 142(3) which says:
“[Subsection 142(1)] above shall not apply to a variation or disclaimer made for any consideration in money or money’s worth other than consideration consisting of the making, in respect of another of the dispositions, of a variation or disclaimer to which that subsection applies.”
And s. 142(1) may apply where:
“within the period of two years after a person’s death—
(a) any of the dispositions … of the property comprised in his estate immediately before his death are varied…”
I can see how the £100,000 payable by the daughter to the son is not “extraneous” in the sense that provision for it is expressly made in terms of the deed of variation itself. But the £100,000 payable by the daughter in terms of the deed was not “comprised in [the father’s] estate immediately before his death”. So, as I see it, such a deed would be caught by s. 142(3).
But I’d be happy to be told I’m missing something?
Tax law is often obtuse and working within it can require one to be illogical and counter-intuitive.
You simply need to draft the changes you wish wholly as a variation of the will: house to daughter, £100k legacy and residue to son. Now nothing “extraneous” and the only consideration for the bargain between the two is another variation of the will, which is specifically permitted.
If insufficient funds do not allow the son to be fully paid out the PRs can create a charge over the house for what he is owed and transfer the benefit to him. After that his sister can pay him off from her own funds. Provided this is not done too soon it should prevent the nasty suspicious HMRC from arguing that a simple agreement for her to pay him £100k for his co-operation pre-dated the variation. Of course that must not actually be true but discussions are not agreement and it would be unusual for there to be an intent to create contractual relations in such circumstances and HMRC have would to prove the contrary, both that intent and a concluded agreement.
SDLT is exempt on a variation within 2 years of death: para 4 Sch 3 FA 2003.
A sale by brother to sister is a CGT part disposal between connected parties so deemed to be at market value. Base cost should be MV at death. Assessing whether £100k is or is not MV is tricky and may involve valuation costs. Hold over relief for any gain will not be available on a PET for IHT. Annual exempt amount now only £6k.
IHT is not entirely straightforward. S10 needs attention and an arm’ length price is not the same as MV, again possibly requiring valuation: IHTM04164. As no return is needed HMRC will only raise the point if the PET fails, though beware of brother making an RPT settlement within 7 years.
Who occupies and who doesn’t may have GROB implications unless neither party does. If the transaction is a gift i.e. a sale at undervalue then s102B and and the POAC may be in point and no one will know until HMRC raise the issue on the brother’s death or he makes a s102(4) PET that fails on his death.
Remember that when s102B is engaged subsection (3) or (4) will need to be fulfilled in the whole of the 7 years before he dies and if at any time they are not POAC becomes relevant because the sale of a part interest (regardless of price!) is not excluded and a gift of such an interest is not exempt if cash is paid. The £5000 disregard is based on the letting value of the whole house whatever % the interest disposed. See IHTM44047,44031, 44059, 44056.
Compared to all that a sale is not the “easiest way” and a variation with reading back for IHT and CGT is a safe harbour walk in the park and will surely not cost more in fees.
Thank you, Jack, for your neat explanation. When the suggestions of making a DoV in such a case was made I’d failed to join the dots and so was puzzled. But it now makes sense; thank you.
The route Jack suggests is one I have recommended many times and HMRC has raised no objections or questions on its adoption.
As Jack says, the arrangement requires no “extraneous consideration”. Even if the daughter uses cash she already holds (or talks a mortgage) to discharge the charge over the property in favour of the brother this does not undermine the efficacy of the variation.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Laura is right to correct me. This now makes s8C TMA seem a little odd. FA 2023 set the sale proceeds disregard at a fixed £50,000 instead of 4 times the AEA, which would now only be £12,000.
The principal objective of any branch of the public sector cohort is to minimise their workload and definitely not to alleviate the costs and burdensome tasks of those they allegedly “serve”. All lower limits, exemptions, and de minimis disregards are there for HMRC’s benefit not that of the taxpayer. The £5000 annual threshold for POAT has not been updated since 2014 and does not apply, as you might assume, to the chargeable amount but to the annual rental value. I am no expert but even I can surmise that 2025 rents have gone up substantially.
I look on, in the comfortably numb glow of Schadenfreude, as the policies of this tax-technically naive Government in causing fiscal drag undermine that traditional objective of Sir Humphrey and his minions.
I do not rejoice in the large number of paper returns, inaccurate simple and discovery assessments, failure to make a return penalties, fraught phone contacts after an hour holding, and general immiseration that will befall digitally-excluded retired pensioners owing just a few bob, save only this: that it will either deservedly inconvenience the Finanzpolitzei or blow up their human resources budget (unless the government comes to their rescue with extra funding from an autumn tax hike). This potential contest may prove to be better than mud wrestling unless you are a participant.