DoV redirecting to surviving spouse and risk of future gifts in way distant future

Dad dies leaving a very old Will giving some of his residuary estate (cash not property) to kids. Kids want to do a deed of variation giving this money back to mum because morally they feel it is the correct thing to do. Right here, right now it appears to be the correct thing to do.

There is certainly no intention to give the varied amount back to the kids in the future. In fact it certainly isn’t even contemplated, but I am conscious that life can change. For example: the surviving spouse might sell up and downsize etc although that is not on the cards at present. However the property value means her estate would titter just above the million mark, so the future sale of the property might trigger some IHT planning.

So roll on time……what if spouse downsizes and so has more ‘cash’ funds available etc and consequently decides to do some lifetime planning making lifetime gifts to kids. It certainly wouldn’t be within mum’s thought pattern that she was returning ‘redirected’ funds in the future but I’m concerned she’ll fall foul of rules to prevent people seeking to abuse the system.

Is the fact that:-
• at the time of the deed of variation was entered into that no gift back is contemplated;
• the deed of variation was created for a legitimate other reason; and
• there is a passage of time between any future (if any) gift
sufficient to prevent HMRC from ignoring the deed of variation or is it tough and simply a cliff edge test?

HMRC’s IHT manual states [IHTM 35093]:

" Where a chargeable beneficiary makes an instrument of variation (IoV) in favour of the deceased’s spouse or civil partner you should ask the taxpayers

  • whether there had been any discussion between the parties before the IoV was made about how the benefit redirected to the spouse or civil partner should be dealt with, and
  • whether subsequent to the IoV the spouse or civil partner has made any transfers to the original chargeable beneficiaries, or is contemplating making any such transfers".

Solicitor’s attendance notes are a source of information for HMRC as to any discussions as to what was discussed (if anything) and decided as between the various parties ie mother and children about what mother would do, or agree to do, with the monies re-directed to her in the future.

Clearly, the longer the time between DoV and any future gift the better. In Lau I recall that gifts were made within 6 months of the DoV (perhaps a touch provocative!).

In Vaughan-Jones [2015] EWHC (Ch) the following possibly helpful comment was made:

" 1. Finally, Mr Oughton addressed me on the additional point raised by HMRC as to the potential application of section 142(3) of the Inheritance Tax Act. Mr Oughton has submitted that the case cited of Lau v Revenue & Customs Commissioners is a decision on its own particular facts, which establishes no general proposition of law beyond the fact that the onus of proof on the issue of consideration rests with the taxpayer. Mr Oughton has taken me in detail through the decision, citing paragraphs 21, 35 to 36, and 46 to 47. He submits that the expression ““any consideration in money or money’'s worth”” is a technical expression which requires a bargain which is sufficiently definite. He submits that it does not include a generalised intention to give sums of an indefinite amount at an indefinite time in the future, which gives rise to no legally enforceable obligation, and where the widow could, without adverse consequences to herself, change her mind at any time".

Malcolm Finney

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Thanks Malcolm. Appreciated.

May not need mention but it is essential that all fees are paid by the donors (the kids) or HMRC may argue that there was consideration.