Never Too Late? IHT Planning After Death.
When someone dies their estate is distributed, according to their Will if they made one, or according to the laws of intestacy if they did not.
It is, however, possible effectively to rewrite a person’s Will after their death, so that their property goes to different beneficiaries. Provided the legal requirements are observed, inheritance tax (IHT) will be charged as if the Will had left the property to those new beneficiaries.
These “variations” are made for a variety of reasons, and not always for tax planning purposes – here are a few examples:
§ Mr Grumpy dies, and leaves all his estate to one of his two younger brothers, Joe (he had an argument about cricket with his other brother, Jack, in 1932 and has not spoken to him since). Joe thinks this is unfair, and so he arranges to vary the Will so that Jack gets half of Mr G’s estate.
§ Mr Ancient dies, leaving £1,000,000 to his son, Marcus. Marcus is 58 years old, a successful businessman, and does not need the money. He therefore varies the Will so that his daughter, Jenny, inherits instead – this tax planning technique is known as “generation skipping”, and the point is that if Marcus had taken the money and left it to Jenny in his Will, there would be more IHT to pay when he died. The variation does not save IHT immediately, but given that Marcus would never have spent the money, it will save IHT when he dies.
§ Mr Nasty dies, leaving a legacy of £10,000 to his estranged son and the rest to his wife. His son does not want the money on principle, so he has a choice – he can vary the Will so that the money goes to the local Cat’s Home (Mr Nasty was allergic to cats), or he can disclaim his legacy, in which case it will go with the rest of the estate to his mother.
§ Mr Generous dies, leaving all his large estate to his son. Before he died, he had expressed a wish to leave a field he owned to the local sports club, but he had never got round to altering his Will. His son transfers the field to the sports club according to his Father’s expressed wishes, and for IHT purposes this will be treated as if Mr Generous had done so in his Will.
§ Mr Deathbed has only a few days to live and realises he has not made a Will. There is no time to do any proper IHT planning before he dies so he makes a very simple Will leaving everything to his wife. After he dies his wife can use a variation to redirect some of his estate in a tax-efficient manner.
§ Mr Goodtimes leaves his holiday cottage to his son, Bill. Bill does a variation in favour of his own son, Ben, but Bill continues to use the cottage for his holidays. If Bill had simply gifted the cottage to Ben, this would have been a “Gift With Reservation Of Benefit” (a GWROB, and as such ignored for IHT purposes – see the September 2006 Tax Insider), but the GWROB rules do not apply to variations.
Types of Variation
As can be seen above, there are three basic ways to change the effect of a Will after a death.
Instrument of Variation
This is what the Grumpy family and the Ancient family used in the examples above. It is usually referred to as a “Deed of Variation”, though in fact it does not have to be in the form of a Deed for tax purposes. The conditions for this form of variation are:
§ It must be in writing
§ It must be made within two years of the death of the person whose will is to be varied
§ It must be signed by all the persons who would have benefited from the property concerned under the original Will – this is not as simple as it sounds – see below
§ It must make clear that it is intended to vary the Will, and exactly how it is to be varied
§ It must include a statement that the relevant statutory provisions are to apply to it
§ If it results in more IHT being payable, it must be sent to HMRC within six months of being signed
All the Beneficiaries Must Sign
Everyone who could benefit from the legacy that is to be varied must sign the instrument. In a straightforward case where the legacy is an absolute legacy to an adult, this is simple, but if the original legacy is, for example, the right to use an asset for life, and then it will pass to another person, then that other person must sign. In some cases, this can make such a variation impossible:
§ If the original legacy is to “my daughter for her lifetime, and then to her children”, it is probably impossible to do the variation, because there could be children as yet unborn who would benefit from the original legacy, and they (obviously) cannot sign the document.
§ In fact, if the original legacy is to a minor (under 18), it is usually impossible to do a variation, because they cannot sign for themselves and anyone acting for them must act in their interests and no-one else’s. This is a particular problem when someone dies without making a Will, because the law on intestacy often means that minors are potential beneficiaries and so a variation is likely to be impossible without getting it approved by the Courts (an expensive and lengthy process, even when it is actually possible)
A disclaimer means that the beneficiary of a legacy renounces his right to it. It differs from a variation because the person making the disclaimer does not say where he wants the money to go – he simply does not want it himself. Disclaimers appear to be simpler than variations, but it is vital to check where the disclaimed legacy will go – this can be a very technical matter and is a question for an expert.
The rules for a disclaimer are:
§ The “two year” and “in writing” rules apply here as well
§ The disclaimer must disclaim the entire legacy, not just part of it. If you are left £10,000, you must disclaim £10,000, not just £5,000. If you are left more than one legacy (say, £10,000, and under a different clause in the will, a house) you can, however, disclaim one and not the other.
Complying with testator’s wishes
This is probably the simplest of the three types of variation. If the deceased person leaves a legacy to a person (A), and before he died he had “expressed a wish” that A should transfer some or all of the legacy to other people, then provided A makes this transfer within two years of the death, for IHT purposes it will be as if the Will had left the legacy to those other people.
The “wish” expressed by the deceased need not be in writing (though in practice it is sensible for the person expressing the wish to write it down), but it must have been expressed in sufficiently certain terms that it is clear what was wanted.
Generally speaking, the effects for tax of all these types of variation are:
§ For IHT, and (with some important exceptions) for capital gains tax it is as if the variations had been part of the original Will
§ For Stamp Duty Land Tax (if land is involved) the exemption for transfers on death will apply
§ For income tax, the variation is not retrospective, so if A inherits an income producing asset and does a variation after one year, A will still be liable to income tax on the income for that one year
Don’t Try This At Home!
I know I often say this, but these forms of variation are highly technical matters, and you must take proper advice on the tax (and legal) consequences. If you try to do a DIY variation, it may cause all sorts of tax problems, and it is also possible that the assets concerned may end up in different hands from those you intended.