Limits on Deed of Variation of foreign inheritance

If a UK residuary beneficiary of a UK Estate gifts their inheritance away via Deed of Variation then the limit of what is covered by the DoV is presumably what they would have received from the Estate after all of the administration expenses, taxes, etc.

Would that also be the case for a UK residuary beneficiary of an Italian Estate? If child of the deceased is entitled to a one-third share of the Italian Estate under the Italian laws of succession and there are various expenses associated with dealing with the Estate assets, is the DoV limited to the net amount they ultimately would receive or could they treat those expenses as personal to them (having inherited the Italian property)? If the latter is the case, would the DoV cover gifts up to the value of the total value of the share of the Estate at date of death?

Samir Hussain

If the interest in the Italian estate has been remitted to the UK before the date of the variation, then I believe the variation will gift the “net” inheritance if the variation is appropriately worded. Subject to my further observations below, the answer as to what the variation covers will depend upon how it is worded – there is no answer that will cover every possible wording (unless, perhaps, you are looking at a very comprehensive book).

However, if the inheritance is still in Italy when the variation is made, you need to consider how it will be treated under Italian law, especially if it is represented by a share in Italian land rather than cash in a bank. I understand there to be specific requirements to gift land, or a share in land, under Italia Law - if not complied with any purported gift is void.

If the inheritance has been remitted to the UK, it should no longer be subject to Italian Law and so it would only be necessary to consider the effect of the variation under the relevant law within the UK.

When considering a variation over property of any nature outside of the UK, it is important to seek advice to obtain an understanding of both the legal implications of the intended variation (can it have legal effect?) and the potential tax implications in that other jurisdiction (it could result in greater, rather than less, tax liabilities overall).

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

I have never encountered an attempt to vary a foreign estate which is not chargeable and arguably it is not within s142 IHTA at all unless it is a chargeable estate i.e. the deceased was domiciled within the UK and so is liable on worldwide assets. If not the “variation” will be a PET or CLT if the client is so domiciled.

I suggest that since the estate and any right to the assets comprised in it are located in Italy it would be necessary to seek local advice about the nature of the right and its appropriate mode of transfer. It can then be established what further formalities if any, are required to comply also with the substantive law of the relevant jurisdiction within the UK and with UK tax law. Plainly an assignment of a thing in action under s136 LPA 1925 applies only to England and Wales: s209(3). So a written assignment by way of variation of an Italian estate or right in it or asset comprised in it with notice to the executors may not be valid in Scotland, never mind in Italy.

I doubt very much it would be prudent to start by executing a document as if the thing in action (the right to residue of an unadministered estate) had a situs in England & Wales, Scotland or Northern Ireland and then present it to HMRC as legally effective without having evidence of Italian Law in the back pocket and presuming it is identical (only the default rule in litigation) or that renvoi applies.

A UK-orientated document might well work ultimately but it might not. If it was intended to attract reading back under s142 IHTA (IHT estate of a domiciliary of a UK jurisdiction includes non-UK assets) it would be bad news to execute the document within the 2 years and find that it did not work and it was then too late to start over. Presumably the plan is to use a variation to avoid the client making a PET or CLT, which would be the effect of the document if it was not a valid variation for s142 (or CGT in s62(6) TCGA).

The variation presumably will not affect the tax due on the death itself so s218A IHTA will not require its early submission to HMRC; a sword of Damocles might be set up if an IOV2 was not submitted voluntarily. IHTM35031 says nothing about checking the legal validity of the variation; Note (1) says it can be by writing and not by Deed which is clearly an allusion to local law. The Form is designed to link to the named deceased but very possibly the estate is not within the charge to UK IHT at all! So some explanation will surely be requested.

I have no personal experience of HMRC challenging the validity of a variation on the grounds that foreign law is different to the law within the UK but they do nit pick about using the correct method of transfer of a UK asset and might in theory do so if Italian law required some formality like notarisation. In general HMRC cannot be bothered to find out what foreign law has to say unless of course it suits their position or the taxpayer takes the point. If you were up against the 2 year deadline you might seek instructions from your client to get on with the variation and cross fingers!

Jack Harper

In my experience, s.142 is not restricted to the estates of persons subject to IHT. HMRC has accepted deeds of variation redirecting an inheritance from various jurisdictions, where the only UK connection is the beneficiary making the deed. Such deeds have been valid under s.142 and do not give rise to either a PET or a CLT by the original beneficiary.

Once assets have been distributed to the UK beneficiary, and are in the UK, they lose their connection to the deceased’s jurisdiction and can be dealt with as any other UK asset.

If, say, a UK beneficiary received £500,000 from a deceased in the USA, and made a deed of variation to settle those funds into a discretionary trust, the settlor would still be the US person, even though for CGT and income tax purposes, the beneficiary would be the settlor. Notwithstanding that the funds originated from the USA, it would not be a US trust.

I have not seen HMRC raise any question about the effect of a deed of variation where the asset(s) subject to the variation are outside of the UK. However, I would not rely upon HMRC’s silence to indicate that any variation valid under a law of the UK is necessarily valid in the jurisdiction in which the asset in question is located.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

I see no problem in a beneficiary under a foreign law will executing a DoV under s142 with reading back as appropriate (reading back having no effect for foreign tax purposes). As the beneficiary is, however, making a gift there may well be foreign tax consequences.

Malcolm Finney

We must disagree Paul.

s142 (1)(a) says" any of the dispositions (whether effected by will, under the law relating to intestacy or otherwise) of the property comprised IN HIS ESTATE immediately before his death are varied". My emphasis.

s5(1)(b) says “the estate of a person immediately before his death does not include excluded property”

s6(1) says: “Property situated outside the United Kingdom is excluded property if the person beneficially entitled to it is an individual domiciled outside the United Kingdom”

Ergo: a variation is not competent to vary the dispositions of excluded property under the will or intestacy of a non-domiciliary.

The bringing of the deceased’s assets to the UK AFTER his death does not make them chargeable ON his death.

A purported variation of excluded property is not however devoid of UK IHT significance as it will be a PET or CLT by a domiciliary like any variation of a UK chargeable estate (inclusive of a non-domiciliary’s UK or Sch A1 assets) where reading back is not elected under s142 or is out of time.

s142 is not about varying the estate of the beneficiary of a will or intestacy but of the dispositions of the estate of the deceased.

It may be valid under a law of the UK if that is the applicable law under its PIL, which may however apply the foreign law. I am not an expert this area but my trusty Cheshire North and Fawcett tells me that the nature of the asset is crucial, whether immovable, tangible movable or intangibile movable. That the lex situs has an awful lot going for it but also the law of the transfer, which may well also be the lex situs. My uneducated guess is that the variation of an estate administered under foreign law or the transfer of assets comprised in it not at the time located in the UK (tangible movables might be perhaps) is likely to be governed by the foreign lex situs of the asset or its transfer under the PIL of England & Wales at least.

Good luck with defending its legal validity to anyone who purports to transfer by a document in English Law form, whether or not expressly governed thereby, or worse governed expressly by a foreign governing law, an asset which at the time has a foreign situs under the PIL of the lex fori, at least if that forum is a court in England or Wales.

What HMRC make of all this I have no idea. I suspect they would want to fudge it but I am very surprised that they would accept a s142 variation of an estate of a non-domiciliary that contained NO actual or deemed UK-situate property at the date of death. A gift of such an asset by a UK domiciliary is obviously fully competent in law in principle but surely at risk of a challenge, by any who stand to gain, on the basis that the gift is not effective in English, Scots or NI Law plus its PIL or the foreign law which it applies to determine legal validity.

So in the example of the USA deceased. the UK beneficiary cannot vary the US estate’s substantive dispositions under s142 and if £500,000 is received in the UK when it is settled into the DT, the settlor for all UK tax purposes is the UK-domiciled transferor. If he settles an intangible right to the legacy, or cash while it is still in a US-situate bank account, the effectiveness may theoretically depend on the law of one of the United States. But if the cash is then later transferred to the DT it is an effective CLT in my view for all interested parties. The transferor would be estopped from pleading legal invalidity, though it might defer the IHT timing of the transfer if HMRC took the point.

Jack Harper

Doesn’t s142(5) modifies s5 and hence excluded property is included in the estate.

Or am I missing something?

Malcolm Finney

No Malcolm you are not missing something. I am! But the effect of s142(5) remains curious.

I have looked at IHTM35071 etc and Chamberlain & Whitehouse but while confirming the principle neither addresses head on the curiosity of the facility to vary the dispositions of a will or intestacy governed by foreign law and comprising no property chargeable to IHT.

s142(5) excludes the deeming fiction of s49(1) so does not apply to “any property to which he is treated as entitled by virtue of section 49(1)”. How does that reconcile with s48(3):

(a)“Where property comprised in a settlement is situated outside the United Kingdom the property (but not a reversionary interest in the property) is excluded property”?

It seems that it is not possible to vary the destination of foreign settled property in which the non-dom deceased had a QIIP but that it is possible to do so with a reversionary interest of his in it–(3)(b)–and any foreign property settled by his will or intestacy regardless of the type of beneficial interests in it.

It is accepted that all of this area functions in a fictional world, so you can redirect an asset which has in fact been sold, but see the uncertainty addressed in IHTM35026. Then there is HMRC invoking the “real world” of poor old dead Walter’s life interest in IHTM35042 and a hint of HMRC having its cake and eat it given a “scheme” in IHTM35094. These have the smell of HMRC making it up as they go along.

In the real world the taxpayer is presumably left with any practical and legal constraints abroad e.g. the executors, following local law, simply refuse to recognise the variation and pay the cash legacy/transfer the specific gift to the original beneficiary/trustees of a settlement or operate forced heirship rules to defeat the variation. So it behoves him before he executes the variation that he has the right to deliver. HMRC may accept the variation but what happens then if it is frustrated?

Finally there is CGT. C&W highlight a few remaining problems at paras 45.56 and .57 and in Example 45.20 how a settlement by variation can still have different settlors for IHT and CGT despite s.68C TCGA 1992

Jack Harper

I don’t seem to have the same reservations and issues which Jack has. I think that it is perfectly possible under DoV subject to UK law (not the law of the testator) under s142 for a UK resident beneficiary to redirect an inheritance on trust where the property inherited is non-UK situs property and the testator is non-UK domiciled.

It would, however, be wise to check whether any foreign tax charges will arise and also to ensure that under the foreign law a transfer of local (ie foreign) property into trust by such a beneficiary would be valid.

Malcolm Finney

Following up on my earlier posting, even when variation had to be submitted to HMRC to be valid under s.142, HMRC issued refunds of IHT on a variation of a non-UK inheritance without question.

Interestingly, the situation to which I referred – settlement by a UK beneficiary of £500,000 inherited from a US estate – arose from discussions with HMRC. That was in the days when the senior staff there were helpful and knew what they were doing.

I re-iterate the caution flagged through many of the posts under this heading, as most recently iterated by Malcolm - it would, however, be wise to check whether any foreign tax charges will arise and also to ensure that under the foreign law a transfer of local (ie foreign) property into trust by such a beneficiary would be valid.

Paul Saunders FCIB TEP

Independent Trust Consultant

Providing support and advice to fellow professionals

Why, Malcolm, is s142 limited to a variation by a “UK resident”? If the deceased’s entire estate comprises excluded property how, Paul, could HMRC issue refunds of IHT? I imagine that might be possible as regards IHT initially chargeable on the later death of a UK domiciliary where the s142 variation diverted property away from him. But the estate of the deceased in that case would have no IHT to pay.

At the risk of enhancing the excitement of this thread still further I observe that a member of the indigenous people of the Amazon who died owning only local property could have his Will’s dispositions varied under s142 by his relatives all of whom were also such people. Who knew? Is this a marketing opportunity?

Jack Harper

S142 variations are not limited to UK residents. I was just using such in my example.

All that is necessary in this regard is that the personal law (determined under English law) of the individual executing the DoV permits it.

Malcolm Finney

My text book on the tax treatment of the Amazonian indigenous people suggests that the personal law thereof would not in fact permit DoVs to be legally executed. However, my book is for the tax year 1998/99 and maybe the laws have changed in which case, as Jack suggests, there could be a marketing opportunity for LexisNexis or Tolleys.

Malcolm Finney

The statute defines the category of those entitled to invoke it as “the persons or any of the persons who benefit or would benefit under the dispositions”. There are no further personal qualifications (what about capacity, undue influence, minority?). It also requires “an instrument in writing”. If these two conditions are fulfilled the tax effect is given a statutory basis for IHT purposes only: “this Act” shall apply.

This approach ignores all other legal issues within the UK or elsewhere that might arise in actual or potential litigation. It does not even attempt to address the property rights of anyone who might be prejudiced by the variation. It is not a requirement that the variation should reduce IHT payable on the death or change it at all. It does not say that a person can object if they stand to suffer a disbenefit; only that if they stand to benefit they must be a party to the instrument.

HMRC are fully aware of this: IHTM35045-35047.They allude to “general law” as having its proper part to play and to the VTA 1958. Given s142(5) and excluded property the applicable law in the Amazon Rainforest may be part of that “general law”, through “UK” private international law which is part of it.

My point is that this is defective legislation again. Those behind its introduction had a very myopic view of how it might operate in the “real world”, which as ever leaves HMRC to fill in gaps in its classic partisan way. And if “real people” kick up a fuss HMRC will leave them to fight it out in the courts while they sit on the fence or, occasionally, intervene to prejudice the outcome in their favour. HMRC have never liked this read-back facility, although their active public opposition is now way back in the past. It might be reasonable to suppose that their institutional disapproval might infect how they handle novel cases. IHTM35094 appears to indicate that they feel entitled to challenge a variation that they consider to be not “bona fide” and part of a “scheme”. Sounds like the Archbishop of Canterbury.

I said early on that I have never encountered an all-foreign case (just as well as I might have given bad advice!) but at least Paul has and it sounds as if HMRC played ball. Of course so far so good but advisers need more than that to advise their clients, particularly when HMRC suddenly decide in a client’s actual case they have been wrong in law all along.

Jack Harper

Thank you all for your helpful comments above. Lots of food for thought.

Samir Hussain