Hi. Am aware that if a beneficiary of an estate lets say widow does a DOV to create a disc trust of which she was a potential beneficiary the trust would be settlor interested for income tax purposes as she was the original beneficiary and has therefore redirected into the trust. I have a scenario where the decd has actually created a nil band disc trust in his will (so he would normally be the settlor for income tax) but the trust couldn’t be funded as assets were held jointly and therefore would have passed under survivorship. The wife has therefore done a DOV just to sever the tenancy so that the will trust could be funded, Am therefore undecided whether the decd or the wife will be deemed settlor for income tax purposes. Any comments grateful
I am wondering if this is actually treated as a disclaimer rather than a variation as the wife is simply not taking the survivorship asset, The deceased’s half share then stays in the estate and passes to trust in accordance with the will and so I think the decd is the settlor?
An interesting issue which I have never considered.
My thoughts are as follows.
A disclaimer is not possible by a surviving joint tenant who takes by survivorship and a joint tenant can’t sever by disclaimer.
Severance of a joint tenancy can only be effected in lifetime (and therefore cannot operate on death).
However, IHTA 1984 s 142 creates a tax fiction. On death, where the surviving joint tenant takes by survivorship, IHTA 1984 s 142 creates a tax fiction which, inter alia, allows a surviving joint tenant to be deemed to have severed the joint tenancy immediately before the testator’s death and to then redirect the inherited interest as desired by the survivor. This then would seem to enable the inherited interest to be redirected on the NRBDT set up by the deceased in the will. The settlor will be the testator.
Others may well have come across this before.
Malcolm Finney
Thank you Malcolm. I came to the conclusion that the deceased was the settlor too for income tax purposes as the asset is passing in accordance with the will following the ‘severance’ and the trust isn’t therefore settlor interested - First time I have come across this scenario
Not sure that I can agree with Malcolm.
A deed of variation is a deed of gift by the original beneficiary which is read back to the date of death for inheritance tax, and some CGT, purposes.
Joint property passing by survivorship does not form any part of the estate which passes under the will.
Where there is a notional severance of joint property, whilst the property might pass on like terms as though it were within the deceased’s estate subject to the will, the variation imposes those provisions, not the will.
It is important to identify what the variation actually purports to happen to the notionally severed share of the property – I have seen variations that result in such “severed” share “passing back” to the surviving co-owner on the basis that the variation made no actual disposal!
In summary, subject to the variation making an effective disposal of the “severed” share, whilst the deceased will be considered settlor for IHT purposes it is the beneficiary making the variation who will be the settlor for income tax and CGT purposes.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
Thanks Paul, I have gone round in circles on this one, Having severed the tenancy 70% of the deceased’s share went into the trust (worth the nil band) and the other 30% went to widow as she was the residuary beneficiary of the estate, Happy the deceased is settlor for IHT but it was his creation of the will trust that was causing my doubt over the income tax settlor although I understand the trust could not have been funded had the action not been taken by the widow to sever.
I note having re-read my post that I seem to state that the settlor is the deceased without being more specific as to identifying the relevant tax.
IHTA 1984 s 142 applies to variations of dispositions whether such dispositions are “effected by will, … intestacy or otherwise”. The reference to “otherwise” would include where the deceased was one of two or more beneficial joint tenants.
On the basis that the severed tenancy is settled on the NRBDT then for IHT the settlor would be the deceased.
Wrt CGT if the severed share becomes settled property then the settlor would be the beneficiary effecting the DoV who is also treated as providing the property settled [ITA 2007 ss 472 and 473].
Wrt income tax, as for CGT, the settlor is the the beneficiary effecting the DoV who is also treated as providing the property settled [TCGA 1992 s 68C].
Malcolm Finney