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TaxationWeb by Jennifer Adams

Many die without leaving a will or make a will that is defective being out of date, incomplete, or inoperable...can anything be done to rectify this? asks Jennifer AdamsTax Planning is normally perceived to be the province of the rich (possibly because they are the only ones able to afford the specialist tax adviser’s fees!) Someone who is taxed solely under PAYE may feel that as tax is deducted from his pay packet automatically then tax planning is not for him. However, there is one eventuality that everyone can plan for - the exact date may be difficult to predict but the outcome is sure.....

We will all die at some time or other.... but despite this certainty statistics show that people are lax in putting their affairs in order as only 3 in 10 have made a will. By the very nature of things at least one of those wills is outdated perhaps leaving money to someone who is already dead. There are many reasons put forward for not making a will - one can sympathise with the thought of "Let them squabble, I won't know anything about it when I'm gone."

However, even if a will is in place many are defective being out of date, incomplete, or inoperable. Examples include:-

• a person may have been excluded from being a beneficiary when they had been lead to believe that they would be included;

• a beneficiary may not want the asset preferring to give it to someone else (no-one can be forced to accept an entitlement they do not want);

• assets detailed in the will were not the testators to bequeath (for example assets which pass by the laws of survivorship and joint tenancy);

• adequate provision has not been made for a claim for dependants under the Inheritance (Provision for Family and Dependants Act 1975); and

• the IHT bill is high as the provisions of the will stand but if altered will decrease the tax bill substantially.

Such a "defective" will can be rectified in four ways:-

1. The Court can decide the validity or otherwise of the will.

2. The Court can add or omit words so that the Will in its final state carries the testators’ intentions.

3. If the will was drawn up correctly but the beneficiary does not want the asset then he can disclaim the gift.

4. The final method is used in particular to mitigate IHT. Under IHTA 1984, s 142 the beneficiaries are allowed to rewrite (or “vary”) some or all of the clauses - the altered elements of the will are then treated as if they were the terms of the original will.

There actually does not have to be a will in place for a Deed of Variation to be executed because even if the deceased died intestate those entitled to the estate can vary the way in which it is distributed. For instance, someone may have received a gift under the rules of intestacy and he may not have known that he was in line to receive the gift. Suddenly he finds himself with an asset he does not want, then it is possible to effect a variation so that the gift goes to those whom he knows the deceased would want to have the gift.

The practicalities of varying a will are also to be found in s142(2) IHTA 1984 and are strictly adhered to by the Revenue. The legislation requires only ‘an instrument in writing’ but it may be prudent to make a formal deed of variation.

The variation has to contain a statement of agreement by the person making the instrument
The Personal Representatives must also sign their agreement if it results in more IHT being payable. The only reason that the Representatives can decline to sign is where the assets are insufficient to pay any additional tax due. There is no need to send a copy of the instrument, containing the statement, to the Board of the Inland Revenue if there is no additional tax to pay.

If the instrument varies any of the dispositions of the property comprised in the deceased's estate immediately before his or her death, the instrument contains a statement, as described above, and the variation does result in additional tax being payable then the relevant persons shall, within six months after the day on which the instrument was made, deliver a copy to the Board of the Inland Revenue. The maximum penalty for failing to comply with the notification requirement where additional tax is payable is £100 plus up to £60 per day after the day on which the failure has been declared by a court or the special commissioners, until notification is made (IHTA 1984, s 245A(1A)).

So even if there is no likelihood of IHT being paid on the original death, a variation may still be something to consider if there is a possibility that a charge may arise on the subsequent death of the beneficiary.

A variation is valid even if just one beneficiary signs in respect of his interest only. It is possible to make a series of variations to one will but obviously one variation is more cost effective than a series; as in everything regarding wills nothing is ever straightforward and it may not be possible to effect all the variations required in one document. For example, it may be that the will needs to be varied so that the gift goes to one beneficiary but then that beneficiary dies within the 2 year limit meaning that another variation is required. That is perfectly acceptable in the Revenue's eyes but Russell v IRC (1988) indicates that you cannot have a variation of a variation; you can, however, rectify a variation if it does not result in what is wanted.

The above is the detail of the IHT position but in altering that then other taxes may be affected.

INCOME TAX

Income Tax is static and cannot be altered by entering into a Deed of Variation – for example, if a block of shares was inherited by one beneficiary and 18 months later a Deed of Variation was entered into transferring the shares to another any dividends received during that period will need to be declared on the original beneficiary’s Tax Return and be taxed accordingly at their highest rate of tax until the date shown on the Deed of Variation.

CAPITAL GAINS

The situation is more complicated with CGT. TCGA 1992, S62(7) states that the Deed of Variation must contain a separate statement to the effect that the variation is intended to be effective for CGT purposes. Just because the statement has been made for IHT does not mean that one has to be made in respect of CGT - each situation must be looked at separately and taken on its own merits. If the CGT statement is made then the assets are passed to the new beneficiaries at the value at the date of death rather than at the value at the date of the Deed of Variation. Hence any increase in value from the date of death is not charged until the beneficiary disposes of the asset.

If the statement is not made and the assets transferred then the original beneficiary will be liable to CGT as if he gave the assets to the beneficiary named under the Deed of Variation. This will therefore require any CGT on the increase in value from the date of death to the date of the Deed to be charged on the original beneficiary. The new beneficiary will then take the assets over at the value at the date of Variation rather than the value at the date of death.

So you could have the situation whereby no statement is made for CGT purposes but there is one for IHT purposes. Obviously one reason for the differing treatments will be if the original beneficiary had CGT losses to offset but did not want to keep the asset.

STAMP DUTY

There are no Stamp Duty implications as variations are exempt instruments under category M of the Stamp Duty (Exempt Instruments) Regulations 1987.

So the ability to ignore (sorry, vary) the terms of a will after death is like a second chance - if the original will and its dispositions are not to the beneficiaries liking then they can be changed and unfortunately there is nothing that the person who made the will can do about it(as he is dead!) A thought - maybe this is the reason why so many do not make a will?