Deed of variation

[Bouleversee]

As previously mentioned, I have suggested to my children that we should vary my husband's will, leaving everything to me, rather than the IHT exempt to them and everything else to me, as the will states presently, so that his IHT exempt allowance and his RNRB allowance (possibly higher sums by then) would be available to set against my estate when I die. I had also thought that I would then make potentially exempt transfers to my children, not necessarily for the same sum (could be more or less,) and hope to live for 7 years or at least 3. I might also make gifts to the grandchildren. I had also been considering making some gifts before Wednesday in case the chancellor decides to reintroduce capital transfer tax. However, having now studied the Instrument of Variation checklist, I see there is a question which asks.

9. Have any assets been brought in from outside the estate and paid to the original beneficiary to compensate for their loss?

and the form says that if the answer to this question (inter alia) is yes, the variation may not be effective for tax purposes.

Does that mean that if I have given my children an equivalent amount of money to the £325k exempt allowance at this point, the latter won't be able to be used when I die, and possibly not the RNRB either? What if I give them a lesser amount at this point, which would have to be the case anyway if one is talking about cash. What if I give them an equivalent amount at a later date? Would the same rule apply?

I do intend to use a solicitor if we go ahead with the variation but may not be able to get an appointment in time to decide on any gifting before Budget Day.

[PinkDalek]

I haven't looked at your suggestions in detail, not least because they are probably beyond my knowledge but re:

... However, having now studied the Instrument of Variation checklist, I see there is a question which asks.

9. Have any assets been brought in from outside the estate and paid to the original beneficiary to compensate for their loss?

and the form says that if the answer to this question (inter alia) is yes, the variation may not be effective for tax purposes.

Does that mean that if I have given my children an equivalent amount of money to the £325k exempt allowance at this point, the latter won't be able to be used when I die, and possibly not the RNRB either? What if I give them a lesser amount at this point, which would have to be the case anyway if one is talking about cash. What if I give them an equivalent amount at a later date? Would the same rule apply? ...

This would appear to be the Instrument of Variation checklist you mention:

https://www.gov.uk/government/uploads/s ... 5/IOV2.pdf

The HMRC Manual talks about Consideration brought in from outside the estate here:

https://www.gov.uk/hmrc-internal-manual ... /ihtm35100

You'll see the three examples. As far as I can see, on a very quick read, Example 1 might be relevant but this talks of an amount over the the IHT nil rate band:

Example 1

A dies leaving his estate worth £400,000 to his sons. The sons enter into a variation redirecting the estate to their mother (to try to obtain spouse or civil partner exemption from IHT).

However, the mother uses £400,000 from her own resources (or borrows the money) to compensate the sons for the loss of their shares in father’s estate.

But for IHTA84/S142 (3), the net result would be that the sons still get £400,000 but no IHT would be payable. Subsection (3) steps in to disapply subsection (1) with the result that the variation cannot be taken into account in determining the tax payable on the father’s death. Thus, spouse or civil partner exemption is denied and the estate remains chargeable to tax.

How this applies to your husband's Estate I don't know as, from what you've said, there's presently no IHT liability as the Will is drafted.

E&OE - I'm not sure I've hit the nail.

[Bouleversee]

PD - You are correct. There wouldn't be any IHT payable as things stand so hopefully it won't apply but I need to be sure. These documents certainly stretch one's brain cells. Why can't they write them more simply?

[Gengulphus]

PD - You are correct. There wouldn't be any IHT payable as things stand so hopefully it won't apply but I need to be sure. These documents certainly stretch one's brain cells. Why can't they write them more simply?

Because they then won't express the complexities of the relevant law correctly, and people will then get annoyed at being misled by the documents...

And as for why the relevant law is so complex, it's because simple laws almost always produce loopholes (allowing people to get off taxes that people would generally feel they ought to be no more immune to than anyone else) and/or injustices (requiring people to pay taxes that people would generally feel it's unreasonable to require them to pay). For political reasons, governments generally eventually respond to block loopholes and correct injustices by amending the law concerned - and the amendments generally add complexities. Only generally, not universally - occasionally a government finds a way to both simplify the law and deal with loopholes/injustices - but that's rare enough that the general trend is towards greater complexity... :-(

Gengulphus

[Lootman]

occasionally a government finds a way to both simplify the law and deal with loopholes/injustices - but that's rare enough that the general trend is towards greater complexity... :-(

I think the pattern is a little more complex than merely tending towards ever more complexity. Because when the law becomes too complex, requiring large numbers of expensive specialists to guide people through them, then there is a cost to society and to the economy, which in turn eventually leads to a push for "deregulation".

A good example is what Reagan did in the US. The tax code had become complicated, with high rates but lots of offsets. Reagan took the radical step of drastically lowering tax rates and, at the same time, removing many deductions, allowances, exemptions and other complexities.

The effect was greater simplicity, less evasion/avoidance and, with a nod to Arthur Laffer, an increase in overall revenues.

Unfortunately, since then various Presidents have been adding complexity again, which has led to the current efforts going on under Trump for tax reform and greater simplicity again.

So my more optimistic view is that there are long periods where ever more complexity is created, followed by revolutions where the whole thing is simplified, and then we start over again. And some nations, like New Zealand and some in Eastern Europe, have done a good job of implementing flat taxes and doing away with a lot of that complexity and obscurity.

Inheritance tax is a good example of how the rules have become out of hand. Just recently the nil rate band has been made more messy by having a different NRB for homes, along with phasing, transferable allowances and so on. At some point there may be a push for a lower IHT rate, fewer exemptions and getting rid of a lot needless work and form-filling.

You will have seen where the same happened with capital gains tax, where a lower rate removed the need for all those pesky indexation computations. Result - more ease and simplicity.

[csearle]

Moderator Message:
Team, we are in danger of straying off onto a different, although I admit interesting, topic. Please could we confine this "thread" to addressing Bouleversee's questions? Thanks. - Chris

[Dod1010]

I do not think you are going to get a definitive answer to your question here. In fact I am sure you are not. The sooner you see a solicitor the better and put your question to him and one versed in this sort of question at that. On the face of it your idea seems OK surely, especially since you are not at this time giving anyone a benefit they do not already have. What you seem to be wanting to do is preserve the right of your executors to call on your late husband's IHT free band when you die. In the meantime you simply make a transfer to your children under the PET rules, accepting that your estate will be liable for IHT on these transfers on a sliding scale depending on when you die. If you can say ' Well I was going to do that anyway' HMRC might not believe you but what can they do about it? Call you a liar and deny your executors the right to use your late husband's tax free band I guess.

Personally I do not worry about such things. Let them sort it out at the time. Meanwhile it will cost you to get advice and if you do decide to go with a Deed of Variation that will cost you some more.

Dod

[Bouleversee]

Well, I saw a solicitor today, a very nice lady, who seemed to think that if we varied the will so that everything came to me and then I gave them a substantial amount of money, when I died HMRC might take the view that I clearly didn't need my husband's money and so not allow his cgt allowance to be used against my estate when I died, on the grounds that it had effectively been used already. One might say that's fair enough except for the fact that his will was made many years ago, when the exempt allowance could not be transferred and used on the second death and if he had changed it in his lifetime, there would have been no problem. As I haven't given any large sums to my children since my husband's death, I could answer " no" to whether any equivalent sum to compensate had been brought in from outside the estate, but the solicitor was suggesting that future gifts might still count. I may seek a second opinion, or I may decide to forget about the variation (for which she would charge£400-500 plus VAT, although I believe there may be some advantage in everything coming to me at the moment as it would make distribution simpler and possibly the executors tax return. Unless the cgt allowance is uplifted considerably by the time I die, It's probably not worth the hassle and may be better to get the dosh out of our estates now and leave me with the freedom to give whatever I think I can afford a.s.a.p. and hope to live for 7 years. Possibly more productive to press on with form 400 and probate as HMRC has a backlog and one cannot apply for probate without their stamp, and the May 1 deadline for the stealth tax (sorry mods. but that's what it is) is fast approaching.

[Bouleversee]

P.S. Nevertheless, I thought the whole point of deeds of variation was to enable people to arrange things in the best interests of the family as they would have done if they hadn't been too ill, too busy or not sufficiently well informed to rewrite their will before they died. I should have asked what would happen if I gave my money to the grandchildren instead.

It would be interesting to know of any cases where wills have been varied in similar circumstances and the exempt amount of the first to die allowed to be used on the second death.

[Dod1010]

I assume your ref to cgt should actually be IHT but that is not important. I have had recent experience of a Deed of Variation for my wife's estate but it simply varied the beneficiaries (benefiting the next generation instead of me) but making no difference to the IHT allowance as her estate was just under the IHT free band anyway.

Frankly I think you might be just as well to forget it, as you are suggesting but for HMRC to suggest that you might not need your husband's money anyway is a weird comment I think. That is a matter of judgement and has nothing to do with the law I would have thought. I cannot say that I really mind my estate paying IHT but I would rather the money went to a charity and that is how I have arranged things, as well as money to grandchildren and the residue (should still be a considerable sum) to my two children.

Best of luck anyway

Dod