Post-death arrangements

Question 1

Why might a a beneficiary chose a variation instead of giving the gift themselved?

Answer 1

IHT:
- the original beneficiary would be making a PET
- this would be a chargeable transfer if they died within 7 years of the gift

CGT:
- A gift of a non-cash asset would be a CGT disposal by the original beneficiary
- Any increase in value of the asset since the date of the deceased’s death would be subject to CGT if the increase is greater than the beneficiary’s tax-free allowance.

Question 2

What is a variation?

Answer 2

A variation is a direction from an original beneficiary to the deceased’s PRs to transfer property that the beneficiary is entitled to under the terms of the will to another person instead.

• A variation is possible after an inheritance has been accepted
• A variation may be made in respect of the whole or part of an inhertiance
• The original beneficiary is free to determine who receives the varied inheritance

Question 3

What are the IHT consequences of a variation?

Answer 3

A variation means the gift is read back into the will: so it is as if the gift was made by the will. (s142 IHTA)

• original beneficiary does not make a PET
• IHT due on the deceased’s death estate is re-calculated on the basis the deceased left the property to the new beneficiary

Question 4

What are the conditions to make a variation?

Answer 4

• made by the original beneficiary in writing
• within two years following the deceased’s death
• contains an express statement by the beneficiary confirming s142 should apply
• not be made for consideration in money or money’s worth

Question 5

Variation: role of the PRs

Answer 5

A beneficiary can vary their entitlement without approval from the PRs.

But if additional IHT is payable as a result of the variation the PRs should:
- sign the variation
- Provide HMRC with a copy of the written variation and pay the amount due

PRs can only refuse to sign if the assets held by them are insufficient to discharge the additional tax payable.

Question 6

What are the CGT consequences of a variation?

Answer 6

There is a similar writing back effect for CGT (s62 TCGA).

Note: cash is not subject to CGT.

These have the same conditions as for IHT:

• made by the original beneficiary in writing
• within two years following the deceased’s death
• contains an express statement by the beneficiary confirming s62 should apply
• not be made for consideration in money or money’s worth

Question 7

Who can make a variation?

Answer 7

Everyone except minors or someone who lacks mental capacity.

Question 8

How many times can a will be varied?

Answer 8

There is no limit but each asset can only be varied once.

Question 9

What is a disclaimer?

Answer 9

A disclaimer is a refusal to accept the property.

There are limitation:
- a beneficiary can only disclaim before acceptance
- a beneficiary can only disclaim the whole gift
- a disclaimer of a beneficiary’s rights under a will will not disclaim any subsequent rights under intestacy
- inheritance will pass as if the gift to the original beneficiary had failed. The original beneficiary cannot control who receives the assets they disclaim.

Question 10

Disclaimers: IHT and CGT

Answer 10

Provisions of s142 and s62 apply in the same way as to variations - “writing back effect”

The original beneficiary is not treated as having made a transfer to the new beneficiary. Instead the deceased’s estate is taxed as though the person who is ultimately entitled had actually been entitled on death.

Question 11

Precatory Trust

Answer 11

Arises where a gift is made with an express wish that the beneficiary distributed their inheritance in accordance with the testator’s wishes. No legal obligation to comply with these wishes.

There is an automatic writing back effect for IHT but not CGT if the testator’s wishes are complied with.

Means any distributions would be considered a disposal for CGT purposes.