I am dealing with an intestate estate, death within 2 years.
A significant compensation award has come in made up of lost earnings and smaller non taxable awards. The interest being deducted on the lost earnings is not in question but the interest being deducted from the accrued statutory interest is huge…
The two beneficiaries are two adult children. 1 higher rate tax payer one basic rate.
Would any variarion work for income tax purposes allowing say child beneficiaries to admit tax deduction certificates?
Without question, a Deed of Variation is only effective for IHT and CGT and most definitely not for Income Tax. A Disclaimer, however, is effective on all fronts, but your client would be giving up their inheritance entirely, not just the income. A disclaimer in an intestacy operates as though the beneficiary disclaiming had died, and, as they are survived by children, they would take in substitution.
A Variation does not work for income tax on income received before the date of its execution. So basic rate tax is due from the executors. There is nothing to prevent the higher rate tax payer disclaiming by deed income not yet received by them personally to avoid higher tax on it but that means diverting it to another beneficiary of the estate, on whom it will be taxed instead, which might not result in an overall tax advantage.
PRs are not mere collection agents. Receipt by them is not receipt by the beneficiary. The disclaiming beneficiary who has an absolute interest in an estate but is not paid any income has no entitlement to residuary estate income, actual or assumed, so is not taxable on it under Chapter 6 of Part 5 ITTOIA 2005.
I think that the income yielded by an asset is a separate legal right from the asset itself so can be disclaimed without disclaiming the asset and that later acceptance of the asset is not a benefit preventing disclaimer of the income.
If HMRC challenge the effectiveness of the disclaimer conceding the point will apparently have no downside.
Thank you.
I knew a Deed of Variation wouldn’t work but thank you for clarifying the Disclaimer would have to go to the next generation - I was wondering whether we could possibly get it further down to the following generation being the non tax payers. I guess we could by having multiple Disclaimers.
In any event…I’ve since learnt this afternoon from the solicitors leading the group claim that if the Administrators appeal the award the award then becomes non taxable - even if they lose; so this looks like a very interesting route!!
I ought to have added that if income from the asset is received it constitutes a benefit that thereafter prevents disclaimer of the asset.
I would be very wary of disclaiming an interest in an intestate estate. I would hope that other issue of the person disclaiming would benefit but s47 AEA 1925 (the statutory trusts) only refers to a parent predeceasing so I fear it would not go down that line per stirpes but rather across. It was this kind of problem that gave rise to s18A WA 1837 as regards a divorced spouse who had to be deemed to have died.