Cornish
I have now located the original posting and reproduce it below for ease of reference.
I have taken advice and I am reliably informed that it IS possible to sever a joint tenancy post death by deed of variation. I am also advised that it is even possible to retrospectively sever joint tenancy of a bank account My apologies to anyone who has been misled.
Please refer to me if I may be if I may be of any further assistance.
Nigel Lord
Can a deed of variation utilise the first 'tax-free slice'?
14 Oct 2002 : Cheshire Taxpayer
My father in law recently died leaving everything to his wife. His most valuable asset was his halfshare of the marital home (total value around £350,000) which passed automatically to his wife as they owned it via a joint tenancy. We were advised that a Deed of Variation, whereby my mother in law passes her late husband's share directly to her son and daughter, may help avoid or reduce IHT on my mother in law's death. But we now understand that she would have to pay rent to her children if she continues to occupy the house - and that rent would count as taxable income. If she were to pay rent, would it only be for the half of the house which she doesn't own? And could the children offset their share of expenses such as electricity, insurance etc against the rental income? As my m-in-l has a small income could she provide services in kind (eg livery for a horse)? She is wary of trusts, mortgages etc. All advice very welcome!
15 Oct 2002 : Nigel Lord
The use of a deed of variation to alter the deceased bequests to ensure that they are inheritance tax efficient is standard practice. It is accepted by the Inland Revenue. Unfortunately, deeds of variation are unable to alter legal entitlements. Where a joint tenancy exists, the jointly owned property (the family home) automatically passed to the other joint owner (your mother-in-law) irrespective of the terms of the will. So varying them will not help the position.
If part, or all, of the property were now gifted to your mother-in-law's proposed benficiaries, this would be a transfer for inheritance tax purposes. If she retained no benefit in the property, this would be a potentially exempt transfer (PET), and would leave her estate completely after 7 years. However, if she continued to live there, and did not pay a commercial rent, it would be a gift with reservation of benefit (GROB) and would be ineffective for inheritance tax planing purposes. If a commercial rent was paid, the recipients would be liable to pay income tax on the net profit at their marginal rate. This would probably not be tax effective.
If one of your mother-in-law's children lived in the property, it would be possible to transfer part of the property to them without adverse tax consequences, but advice should be taken.
There is a partial solution that may be acceptable, but it does involve establishing a trust. It would be relatively low cost and uncomplicated as far as your mother-in-law is concerned. She would be able to continue to retain control of assets and enjoy income, but her estate would benefit by reducing its exposure to tax by 40% on up to £250,000 worth of assets.
If you would like my firm to implement this planning, or to review your mother-in-law's estate's exposure to inheritance tax, we would be pleased to act on your family's behalf.
Nigel Lord
15 Oct 2002 : Cheshire Taxpayer
Thank you for your comments - we will speak to my mother in law about a trust. Incidentally I understand that a Deed of Variation can be used to redirect an asset held in a joint tenancy which would otherwise pass to the surviving joint tenant and that by means of a statutory fiction the Revenue will, if required, treat the gift as having been made by the deceased person (Ref: Deeds of Variation, Thomas Snell & Passmore,
www.ts-p.co.uk). Hence my question about rent being payable by my mother in law on only half the house; if this were the case it might help a bit but as you point out any rent is taxable and so we could lose any advantage gained.
The property in question is a 9-acre smallholding with fields, woodland, stables and a pig breeding unit, and until my father-in-law's retirement 15 years ago was run as a farm. It still requires considerable upkeep and paid assistance to keep going although there is now only one horse - would it be possible for m-in-l to set these expenses and her own hard work against a market rent?
15 Oct 2002 : Nigel Lord
The market rent that would need to be payable would be that which any onconnected person would pay for the benefit provided. It would therefore be set at a level that would recognise the costs and efforts required to maintain the property.
Any costs absorbed by the new owner(s) would be relievable against the rental income.
As there is a much more cost effective option available (the deed of variation and will trust), that would require less administration than the market rent option, I recommend that this is the strategy followed.
Nigel Lord
