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Where Taxpayers and Advisers Meet

question on deed of variation

riccardob
Posts:105
Joined:Sun May 29, 2011 10:02 am
Re: question on deed of variation

Postby riccardob » Tue Jan 03, 2017 2:40 pm

Thanks Ian.

If A is domiciled abroad and dies and leaves estate X to B, can B (UK dom) give the proceeds straight to C and safeguard this (X) from future death duties by writing a DOV?
I don't mind using a solicitor but I want to clarify whether a deed would help to avoid tax in the future.

IanDarkwater
Posts:49
Joined:Fri Oct 31, 2008 10:55 am

Re: question on deed of variation

Postby IanDarkwater » Tue Jan 03, 2017 4:31 pm

I don't understand. There is no such thing as death duties; I think you mean Inheritance Tax (IHT).

If A is domiciled abroad then HMRC have no interest in his/her death. B inherits. Are you exploring the situation whereby B's estate, including the inheritance, is expected to above the IHT Nil Rate Band threshold when B dies & he/she would like to use an Instrument of Variation (IoV) to redirect the inheritance received from A onto C?

Don't forget B's Nil Rate band is at least £350,000 & may be as much as £1 Million by 2020.

If this is so then the answer is that the only advantage of using an IoV instead of B making a simple gift of the inheritance to C is that the IoV may save IHT if B does not survive 7 years after making the gift to C.

Again it's not a deed - forget all about deed's.

riccardob
Posts:105
Joined:Sun May 29, 2011 10:02 am

Re: question on deed of variation

Postby riccardob » Tue Jan 03, 2017 10:50 pm

the scenario described is as you say, if b dies within seven years of making the gift to c.

do you agree it would be useful to avoid iht on the gift made by b?

riccardob
Posts:105
Joined:Sun May 29, 2011 10:02 am

Re: question on deed of variation

Postby riccardob » Tue Jan 03, 2017 10:57 pm

the scenario described is as you say, if b dies within seven years of making the gift to c.

do you agree it would be useful to avoid iht on the gift made by b?
i have had a look at the hmrc manual and it does not mention witnesses.is a witness definetly required?

IanDarkwater
Posts:49
Joined:Fri Oct 31, 2008 10:55 am

Re: question on deed of variation

Postby IanDarkwater » Sun Jan 08, 2017 1:30 am

It may. I repeat I think you would be foolish to proceed with this on the basis of what I have said when I cannot have full knowledge of the situation. I would point out that you don't know who I am & whether I know what I'm talking about!

Before proceeding PLEASE TAKE PAID FOR ADVICE FROM A QUALIFIED PROFESSIONAL WHO CARRIES PROFESSIONAL INDEMNITY INSURANCE TO BACK UP HIS/HER ADVICE.

I did say that there is no set format for an IOV & that includes whether it should be witnessed. Witnessing would be a prudent & sensible thing to do & I can't see why you would not want to use a witness. If the IOV is ever questioned the witness will be important.

riccardob
Posts:105
Joined:Sun May 29, 2011 10:02 am

Re: question on deed of variation

Postby riccardob » Fri Jan 13, 2017 12:53 pm

I'd be grateful if Maths could give his opinion on all this.

maths
Posts:8200
Joined:Wed Aug 06, 2008 3:25 pm

Re: question on deed of variation

Postby maths » Fri Jan 13, 2017 8:51 pm

1. The legislation (IHTA 1984 s142) refers to "........dispositions.......varied......by an instrument in writing....".The legislation does not refer to a "deed of variation".

2. However, in practice most (but not all) instruments are executed as deeds. This is because an instrument of variation must not be made in exchange for any consideration and to make it binding and enforceable a deed is necessary. However, it is known that HMRC will accept a simple letter (ie not a deed) so long as all the s142 conditions are satisfied.

3. Amongst other things, for a document to take effect as a deed requires that the document makes it clear that it is intended to be a deed and must be witnessed.

4. The instrument needs to be signed by those who initially inherited the property and then wish to dispose of it. Beneficiaries under the will who are not affected by the variation do not need to sign or otherwise be involved.
The executors (under a will) are not required to be signatories unless the effect of the variation is to increase the IHT charged on the deceased's estate. In such cases the executors must sign and in addition the instrument of variation must be submitted to HMRC within 6 months of signature (IHTA 1984 s218A). Strictly speaking the executors must so sign where there is an increase in the IHT and a statement of so-called "reading back" is included in the variation .
"Reading back" refers to the requirement that the variation is to be treated as if it had been effected by the deceased; this then ensures, inter alia, that the person effecting the variation is not treated as having made a transfer of value (eg a PET).

5. The instrument must be executed within 2 years of death.

6. The variation may also have CGT effects (TCGA 1992 s62).

Despite the apparent simplicity of the variation concept the legislation is a little complex and care must be exercised to ensure that any instrument of variation is executed correctly and any conditions laid down in the legislation are satisfied. The document of variation is not required to be drawn up by a solicitor although this is often advisable. This forum makes general comments but cannot take into account all the facts known to the poster of the query.

maths
Posts:8200
Joined:Wed Aug 06, 2008 3:25 pm

Re: question on deed of variation

Postby maths » Sat Jan 14, 2017 3:11 pm

'll explain better: a has died and b has inherited from a but b is old and wants to donate to c.
as I understand it a dov written by b would help c avoid iht on b death.
is this correct?
Correct.

If b executed an instrument of variation then the property b was due to inherit from a would not be so inherited and c would be treated as if c had inherited the property directly from a. As a consequence, on b's death his estate is smaller than it would otherwise be and hence IHT would be less on b's death estate.

The domicile/deemed domicile status of the parties is relevant. For example: if b is not UK domiciled (or deemed domiciled) and the property he inherits from a can be located overseas then it would then on b's death be excluded property and no IHT charge would arise thereon when b leaves it to c; hence in this situation there would be no necessity to execute a variation.

riccardob
Posts:105
Joined:Sun May 29, 2011 10:02 am

Re: question on deed of variation

Postby riccardob » Sun Jan 15, 2017 1:26 pm

'll explain better: a has died and b has inherited from a but b is old and wants to donate to c.
as I understand it a dov written by b would help c avoid iht on b death.
is this correct?
Correct.

If b executed an instrument of variation then the property b was due to inherit from a would not be so inherited and c would be treated as if c had inherited the property directly from a. As a consequence, on b's death his estate is smaller than it would otherwise be and hence IHT would be less on b's death estate.

The domicile/deemed domicile status of the parties is relevant. For example: if b is not UK domiciled (or deemed domiciled) and the property he inherits from a can be located overseas then it would then on b's death be excluded property and no IHT charge would arise thereon when b leaves it to c; hence in this situation there would be no necessity to execute a variation.
thanks maths.

don' t you think it would be best for b to secure a deed of v anyway even if he is domicilied abroad but uk resident?

tax domicile rules can change and are somewhat subjective and b could become uk domiciled.

hmrc could argue that at the time of b receiving said ih, he was uk domiciled; a dov would avoid this issue
even if it came about.

maths
Posts:8200
Joined:Wed Aug 06, 2008 3:25 pm

Re: question on deed of variation

Postby maths » Sun Jan 15, 2017 3:11 pm

Can't disagree with your comments.

As I stated, any final decision needs to be based on the particular facts.


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