Deeds of Variation A Precedent and Notes

Deeds of VariationA Precedent and Notes

Ralph P Ray FTII BSc (Econ) TEP, Tax Consultant, Shoosmiths & Harrison

(all statutory references are to the Inheritance Tax Act 1984 unless otherwise stated)

It should be borne in mind that the law on variation of wills is likely to change. Severe restrictions were included in the 1989 Finance Bill. Although these proposals were dropped, it was stated that `more targeted' amendments might be brought forward in the future.

The precedent set out in this article covers a situation where a wealthy father has left the bulk of his estate to his daughter. She does not wish to take all the estate and has set up an appropriate family settlement for her children (eg. an accumulation and maintenance trust under s71). She decides to vary her entitlement under her father's will so that part of the residue [say £154,000 being the nil band from 6 April 1995, (until 6th April, 1996 when it increases to £200,000)] goes to the trustees of the said settlement instead of her.

Notes:

  • For income tax purposes, in view of TA 1988, s660B any income should be accumulated during the children's minority (or until earlier marriage).
  • For capital gains tax purposes, the original beneficiary i.e. the daughter, is the settlor not the deceased (as is the case for IHT) - see Marshall v Kerr [1994] STC 638.

The precedent referred to above:

THIS DEED OF VARIATION is made(1)

the day of 199 between ABC of (hereinafter called `the Legatee') of the first part DEF of and GHI of (hereinafter called `the Trustees') of the second part and JKL of MNO of and PQR of (hereinafter called the `personal representatives') of the third part.

WHEREAS:

(1) The Trustees are the present Trustees of a Settlement dated 199 (hereinafter called `the Settlement') and made between the Legatee of the one part and the Trustees of the other part principally for the benefit of the Legatee's children.

(2) By his last Will dated 19 (as varied by [two] Codicils dated respectively 19 , and 19) STU (hereinafter called `the deceased') who was the father of the Legatee left his residuary estate to the Legatee (the deceased's wife having predeceased him).

(3) The deceased died on the 199 (2) without having varied or revoked his said Will as so varied by the said Codicils and was survived by the Legatee but not by his wife.

(4) The said Will with the [two] codicils were proved in the (Principal) Probate Registry Family Division of the High Court of Justice on day of 199 by the personal representatives.

(5) (The Legatee has received no benefit directly or indirectly from the deceased residuary estate (3) and) the parties hereto are now desirous of varying (4) the terms of the said Will and Codicils by way of family arrangement so that (£154,000) out of the Legatee's share in the deceased's residuary estate (hereinafter called `the fund') is given to the Trustees to be held by them on the trusts of the settlement insofar as the same are now subsisting.

NOW THIS DEED WITNESSETH (5) as follows:

1. (a) (6) The said will of the deceased shall be read and construed and be deemed to have taken effect from the death of the deceased as if in the said will (and in priority to any other gift in the said will as hereby varied) he had made a gift in terms and the wording set out in subclause (b) hereof and as if the Settlement was then in existence.(b) The wording and terms of the gift deemed to have contained in the said will of the deceased are as follows:

`I give (subject to tax) the fund and all income therefrom (but only as from the date of this deed of variation) to the Trustees of the Settlement TO BE HELD by them upon the trusts of the Settlement and as an accretion for all purposes to the existing sums held on the trusts thereof'.

2. The fund shall comprise the assets set out in the Schedule hereto(7).

3. In furtherance of the foregoing (but without prejudice to the generality thereof) each of the parties agrees and confirms that this deed is entered into and shall apply as if the variation of the deceased's bequests as herein referred to had been effected by the deceased and for the purpose in particular (but without prejudice to the generality of the foregoing) in pursuance of the provisions of the Inheritance Tax Act 1984, 142 and the Taxation of Chargeable Gains Act (`TCGA') 1992 s62 and any statutory modifications or re-enactment thereof.

4. Accordingly the Legatee and the Trustees hereby irrevocably request the personal representatives to give effect to the provisions of this deed in lieu of the relevant provisions contained in the said Will and Codicils and hereby indemnify the personal representatives and each of them and their respective estates and effects from and against all claims demands and expenses arising at any time by reason of their so doing. The personal representatives agree to implement the foregoing requests.

5. It is hereby certified that (etc.) (8) that this instruments falls within category `M' and/or `L' in the Schedule to the Stamp Duty (Exempt Instruments) Regulations 1987.

THE SCHEDULE above referred to:

(the £154,000 fund)

IN WITNESS etc.

Footnotes on the precedent

(1) and (2) Time Limits:

a) Up to two years from the date of STU's death: s142 (1)

b) But as this case involves a variation, an election notice has to be given within six months after the date of the deed to the Board of the Inland Revenue (i.e. the Capital Taxes Office) or such longer times as the Board may allow: s152 (2)-

Such notice could be in the form that follows:

To Board of Inland Revenue

(Capital Taxes Office)

Re STU deceased - Deed of Variation

dated 199

Election IHTA 1984 s142

We the undersigned being the parties to the above deed (a certified true copy of which is attached) HEREBY GIVE YOU NOTICE that in pursuance of the Inheritance Tax Act 1984, s142 (2) we ELECT that sub-s 1 of that s 142 shall apply to the variation effected by the said deed.

Please return the attached copy of this notice duly acknowledged

Dated 199

Signed ABC JKL

DEF MNO

GHI PQR

(ON COPY)

We acknowledge receipt of the above notice under IHTA 1984, s 142 (2)

Dated 199

Signed

for and on behalf of the Board of Inland Revenue

NOTES: The notice is signed by all relevant parties including the personal representatives (see s 142 (2) (b)) - See also note (4) below.

A separate election (if wished) for CGT should be sent addressed to the Inspector of Taxes and pursuant to TCGA s62 (7).

A separate election is preferable to including it in deed itself as it gives up to six months' leeway to consider whether or elect or not;

3) The receipt of any such benefit no longer prevents relief under s 142 for a variation - see Inland Revenue Press release of 11 April 1978;

4) (a) As there is here clearly a `variation' (contrast a disclaimer), the election notice procedure applies. In some cases it can be appropriate not to elect - for example where the gift in the will is to a widow(er) in which case it may be better for such widow(er) to make a potentially exempt transfer.

(b) As to CGT normally elect because of CGT death exemption. BUT consider not electing to get the higher base value at time of beneficiary's disposal especially if the gain can be mopped up by the beneficiaries small gain, exemption as from 6.4.95 £6,000 (£6.300 from 6th April 1996) or available losses.

5) (a) There must be no consideration in money or money's worth (other than consideration consisting of a qualifying variation or disclaimer): s142 (3) and s49 (8) NB s10 payment of legal costs can constitute consideration.

(b) In Russell v IRC (1988) STC 195 it was decided that there cannot be two bites of the cherry in respect of the same asset. Once a deed of variation has been entered into, a further purported redirection deemed to have been by the deceased in respect of the relevant assets was not valid. See also the reference to Lake v Lake (1989) STC 865.

6) Following the announcement in Law Society's Gazette, 7 November 1984, p3058, it is advisable to use this wording, i.e. indicating that the deceased's property comprised in his estate immediately prior to his death is being varied. This is so even though the Revenue's strict view has apparently changed - see Law Society's Gazette, 22 May 1984, p1454.

7) It is presumed that the personal representatives have the appropriate power of appropriation, e.g. under the Administration of Estates Act 1925, s 41.

8) Variations are now exempt from stamp duty and the need for adjudication provided an appropriate certificate is given under the Stamp Duty (Exempt Instruments) regulations 1987 (SI 1987/516). (Disclaimers are also exempt from stamp duty).

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