5. Post Death Changes (variations, disclaimers, precatory trusts)

Question 1

what are the IHT consequences of an original beneficiary giving away their inheritance?

Answer 1

• the original B would be making a PET
• this would be a chargeable transfer if they died within 7 years of the gift

Question 2

what are the CGT consequences of an original beneficiary giving away their inheritance?

Answer 2

• a gift of a non-cash asset would be a CGT disposal by the original B
• any increase in value of the asset since the date of death would be subject to CGT if the gain exceeds B’s tax-free allowance

Question 3

what is a variation?

Answer 3

a direction from an original B to the deceased’s PRs to transfer property that B is entitled to under the will or intestacy to another person

Question 4

why make a formal variation?

Answer 4

to take advantage of the s142 IHTA and/or s62 CGT provisions

Question 5

IHT consequences of a variation

Answer 5

• varied inheritance is ‘read back’ to the date of death and treated as having been made by the deceased to the new beneficiary
• therefore original beneficiary will not have to worry about making a PET
• IHT due on the death estate is recalculated on the basis that the property was left to the new beneficiary

Question 6

advantages of a variation

Answer 6

• made after B accepts the inheritance
• whole or part
• freedom to determine ultimate destination of varied inheritance
• without approval of PRs (unless it results in addl IHT being payable, then sign variation, provide HMRC with a copy of written variation, and pay amount due)

Question 7

conditions for a variation (s142(1) IHTA)

Answer 7

• made by original B, in writing (a deed is not required, but often used)
• within 2 years following deceased’s death
• express statement that s142 IHTA should apply
• not for consideration in money or money’s worth

Question 8

when can the PRs refuse to sign the variation/approve the writing back under s142?

Answer 8

if the assets held by them are insufficient to discharge the additional IHT liability

Question 9

CGT recap

Answer 9

disposal value minus acquisition value = gain

gain minus TFA (3,000) = amount charged to CGT

Question 10

CGT consequences of a variation

Answer 10

• gift is written back to the date of death and treated as having been made by the deceased
• original beneficiary treated as having not made the disposal
• new beneficiary deemed to acquire assets at date of death value (not date of variation value)
• any increase in value of the assets since date of death will be taxed to the new beneficiary if/when they later dispose of it

Question 11

which assets do the CGT writing back provisions apply to?

Answer 11

non-cash assets

cash is exempt from CGT

Question 12

how can minors or those without mental capacity make variations?

Answer 12

• court consent under Variation of Trusts Act 1958
• expensive and time consuming app

Question 13

limitations on what and how many variations?

Answer 13

• will can be varied unlimited times
• but each asset only once
• cannot vary property where deceased was a life tenant immediately before death (trust deed determines the destination - remainderman)
• cannot vary GROB (because deceased was not the legal owner of the assets. does not form part of distribution estate, BUT is subject to IHT)

Question 14

what is a disclaimer?

Answer 14

operates as a refusal to accept property to which a beneficiary is entitled, either under the intestacy rules or under the terms of a will.

Consider disclaimer to be rejecting the status as beneficiary under a will, not rejecting the property.

Question 15

how can a disclaimer be made?

Answer 15

orally or in writing

Note: must be in writing to take advantage of the writing back provisions

Question 16

how is a disclaimer different from a variation?

Answer 16

• disclaimer only before accepting inheritance
• whole gift only
• disclaiming a gift does not mean disclaiming rights under intestacy
• original B cannot control ultimate destination of the gift
• inheritance passes as if the gift had initially failed, thereby passing in line with the will or intestacy rules

Question 17

writing back rules for disclaimers

Answer 17

s142 IHTA and/or s62 TCGA apply to disclaimers in the same way as to variations

Question 18

of disclaimers and variations, which is usually preferred and why?

Answer 18

disclaimers - more straightforward than a variation

Question 19

what is a precatory trust?

Answer 19

arises where a gift is made to a beneficiary by will with a wish expressed as to how the beneficiary should pass on those assets to others

Question 20

example of precatory trusts

Answer 20

I give my gold rings stored in the safe in my bedroom to my daughter with the hope that she distributes these according to the letter of wishes I have left with this will

Question 21

IHT consequences of precatory trusts

Answer 21

if the original beneficiary makes the distributions intended by the testator within 2 years of the testator’s death, these are treated for IHT purposes as gifts made by the testator’s will and not the original beneficiary. This happens automatically and no written election is necessary (s143 IHTA)

Question 22

CGT consequences of precatory trusts?

Answer 22

s62 Taxation of Chargeable Gains Act 1992 does not apply.

Therefore, a re-distribution in accordance with testator’s wishes would be treated as a disposal by
the original beneficiary.

However this is not usually an issue because:
* there is likely to only be a short time between the death of the testator and the distribution by
the beneficiary, and
* most chattels are unlikely to increase significantly in value.

Question 23

sqe2 post death change tax question: structure

Answer 23

1. what are the advantages of a post death change? explain what a variation or disclaimer is
2. s142 IHTA and s62 TCGA (CGT) writing back provisions - what are the requirements?
3. effect of s142 IHTA election / no election
4. effect of s62 TCGA election / no election

Question 24

where does a disclaimed gift go?

Answer 24

into the residue, or into partial intestacy if the gift is the residue