Legacy created by Deed of Variation

I have a Probate where a substantial legacy has been created by Deed of Variation. For various reasons we are only in a position to now pay the legacy almost 20 months after the death of the deceased
Do I need to pay interest on the legacy?

My thoughts are no as the legacy is really a gift by the original beneficiary with IHT benefits as a result of the IHT election. I would welcome views though

Gail Donaldson
Neves Solicitors LLP

A very interesting question. I think the answer is that it depends on the original gift.

If, for example, the DoV simply redirects a pecuniary legacy under a will (either in whole or in part), then interest would be payable because that entitlement to interest arose under the will. Depending on the DoV, that interest will then be payable either to the original beneficiary, or the new beneficiary.

If, however, the DoV carves out a legacy from a chunk of residue, or the proceeds of sale of a specific legacy, then I cannot see how there could be an entitlement to interest (ignoring the possibility that interest might be payable under the solicitor’s accounting rules). As you have pointed out, the DoV is really just a ‘tax wrapper’ on a gift from a beneficiary to a third party; they cannot grant an entitlement that they do not themselves possess.

I think this conclusion is a logical necessity. Imagine a 50% residuary beneficiary who, after the value of his entitlement is known, redirects that interest in the form of a legacy to his spouse that completely exhausts his entitlement. It cannot be right that the other residuary beneficiary now has to pay the spouse interest on the ‘legacy’!

Taurean Drayak
Elliot, Bond & Banbury

If the deed of variation adopts the sort of wording that is commonly used, whereby the will is deemed to take effect as though it had contained the legacy then, as a matter of interpretation, I would say that interest does need to be paid on the legacy. I have often seen deeds of variation which include wording that specifically excludes the entitlement to interest, and this wording is presumably included for a reason.

Paul Davies

As Taurean points out, a gift under a deed of variation is not a legacy, but a gift dressed with IHT (and some CGT) benefits.

He also identifies that the beneficiary making the gift cannot give away more than that to which they are entitled.

Under normal circumstances, a simple gift carries no right to interest or income until it is paid. However, if the variation states that the gift to be treated as a legacy under a will, the position becomes uncertain as the argument that the gift carries a right to interest after the end of the executor’s year creeps in. It then becomes even more questionable where the variation is made over a year after death – from what date does interest run, the date of the variation, or from the end of the executor’s year? In most cases the original beneficiary (or their advisers) will not even have considered the question of interest, merely focussing on the amount of their intended gift.

If one looks to intention, unless the variation specifies that interest or income is to be payable, I would be inclined to the view that a simple gift it carries no right to income or interest. Where there could be a dispute, it may be appropriate to have access to the draftsman’s instructions and file for the variation, to see if this aspect was even discussed.

I believe that those drafting deeds of variation should identify if there is any intention that the beneficiary of the variation be entitled to interest or income and, where there is no such intention, suggest the inclusion of words to put the question beyond doubt, perhaps along the line of “provided that such gift shall carry no right to interest or income prior to its actual date of payment/satisfaction”.

If those drafting variations have a checklist, they might add a question about interest which, hopefully, would enable their deeds to put the question beyond doubt.

Paul Saunders

This is all very helpful. It was never anticipated that the estate would take so long to wind up but it was the IHT position that took a long time to resolve. I’ll go back to the beneficiary and take their views

Thanks to all

Gail Donaldson
Neves Solicitors LLP