Post-death Arrangements (variations, disclaimers, and precatory trusts)

Question 1

why would a beneficiary want to change their inheritance?

Answer 1

B finds the distribution under a will or intestacy rules unsatisfactory because -

• inadequate provision was made for someone else
• B does not want all or part of their inheritance
• distribution results in undesirable tax situation

Question 2

why can’t the beneficiary simply gift their inheritance to someone else instead of varying the distribution?

Answer 2

TAX:

• IHT: B would be making a PET - if B died within 7 years this is chargeable to IHT
• CGT: a gift of a non-cash asset is a disposal by B so if it increased in value there may be a chargeable gain taxed to CGT if it exceeds B’s tax-free allowance

Question 3

what are 4 methods of varying inheritance post-death?

Answer 3

(1) variation

(2) disclaimer

(3) precatory trust

(4) court order (IPDFA claim)

Question 4

what is a variation?

Answer 4

• B can direct to PRs to transfer all or some of the property B is entitled to from the succession estate to another person nominated by B
• B must be adult with capacity (otherwise court order needed)
• usually done with a deed of variation

Question 5

is variation possible after B accepts their inheritance?

Answer 5

yes

Question 6

is there a limit on how many times B can vary their inheritance?

Answer 6

no limit on how many gifts can be varied but one gift can only be varied once for tax consequences to apply

Question 7

tax consequences of variation?

Answer 7

IHT =

• gift for old B is ‘read back’ so the deceased’s estate is taxed as if the new B was entitled to the gift as if it was made on the deceased’s death (IHT calculations may change if exemptions/ reliefs apply/ cease to apply)
• old B not considered to have made a potential PET

CGT = non-cash asset deemed to pass to new B from date of death, and old B not deemed to have made a disposal

Question 8

What are the requirements for a variation to have IHT or CGT consequences?

Answer 8

conditions to be met =

1. old B made variation in writing (via deed of variation usually)
2. within 2 years of death
3. expressly states that s 142 IHTA / s62 TCGA should apply
4. not made for consideration or money’s worth

(these do not have to be met if B does not want tax consequences to result from variation)

Question 9

Do PRs have to consent to a variation?

Answer 9

B can vary entitlement without approval of PRs

BUT if variation raises IHT payable:

• PRs must sign variation
• PRs must provide HMRC with a copy of the written variation and pay the amount

PRs can refuse to sign variation if they have insufficient assets to pay additional IHT

Question 10

do the tax consequences of variation have to apply?

Answer 10

No - the old B can choose whether or not the effect of variation is to write back the gift and result in any tax consequences

If B does not want tax consequences, no formality requirements apply

B could want tax consequences not to apply if a gain is not made from date of death to date of disposal so CGT is not going to be charged anyway

Question 11

what is a disclaimer?

Answer 11

B refuses to accept inheritance under intestacy or a will

Question 12

when is a B allowed to disclaim?

Answer 12

only before it accepts the gift

within 2 years of death

Question 13

can B designate a person to receive the inheritance if B disclaims?

Answer 13

No - B cannot choose who the inheritance goes to

the effect of disclaiming is that the gift to the old B is treated as if it failed

Intestacy rules or the will decide where the gift goes to

Question 14

can B disclaim part of the inheritance?

Answer 14

no - only the whole inheritance

Question 15

tax consequences for disclaiming a gift?

Answer 15

same as variation

IHT =

• gift for old B is ‘read back’ so the deceased’s estate is taxed as if the new B was entitled to the gift as if it was made on the deceased’s death (IHT calculations may change if exemptions/ reliefs apply/ cease to apply)
• old B not considered to have made a potential PET

CGT = non-cash asset deemed to pass to new B from date of death, and old B not deemed to have made a disposal

Question 16

Requirements for a disclaimer to have IHT or CGT consequences?

Answer 16

same as variation

conditions to be met =

1) old B made variation in writing

2) within 2 years of death

3) expressly states that s 142 should apply

4) not made for consideration or money’s worth

(these do not have to be met if B does not want tax consequences to result from variation)

Question 17

what is a precatory trust?

Answer 17

• a gift made to a beneficiary in a will with a wish expressed as to how the beneficiary should pass on those assets to others (e.g., in a letter of wishes)
• this is not binding on the beneficiary
• no trust is created

Question 18

what is the IHT consequence if a beneficiary followed the deceased’s wishes under a precatory trust?

Answer 18

if the beneficiary makes the distribution as the testator intended within 2 years of death, these are treated as gifts made by the will at death for IHT purposes and not by the beneficiary

so the beneficiary is not treated as having made a PET

Question 19

are there any formality requirements for IHT writing back consequences to apply after distributions are made by a beneficiary under a precatory trust?

Answer 19

no - writing back takes effect automatically for IHT

Question 20

what are the CGT consequences if a beneficiary followed the deceased’s wishes under a precatory trust?

Answer 20

no writing back for CGT

distribution is treated as a disposal for the beneficiary’s CGT purposes and CGT may be payable by the beneficiary if a chargeable gain is made