Call for evidence outcome

Review looking at the use of Deeds of Variation (DoV) for tax purposes

Updated 9 December 2015

1. Issue

At Budget 2015 the government announced that it will review the use of Deeds of Variation (DoV) for tax purposes. In order to review and obtain more information about them, HM Revenue and Customs (HMRC) is seeking evidence from a wide range of representative bodies and individuals.

2. Scope of the review

The scope of this review is restricted to the use of DoV for tax purposes only and will not consider their use as a legal instrument, which is a matter for the Ministry of Justice.

3. Aims of the review

The aim of the review is to:

• explore the circumstances in which DoV are used for tax purposes
• develop an understanding as to the frequency with which DoV are used for tax purposes
• examine how the current tax provisions around DoV are operating
• establish what changes, if any, should be made to the current tax rules

4. Purpose of the review

Any deeds made on or after 1 August 2002 only have to be delivered to HMRC where they result in a change to the amount of tax due. HMRC therefore have limited information about the use of DoV, particularly for purposes other than gaining a tax advantage.

If made within 2 years of death a deed of variation can result in a change to the amount of inheritance tax or capital gains tax due. The Government wants to work with stakeholders to review how they are used for tax purposes to ensure that they are not being abused.

We would therefore welcome views about the use and effect of these instruments to gain a better understanding of them and to inform the review. The questionnaire has been designed with the aim of understanding what role the tax advantages play when a decision is made to vary a will by a DoV.

5. Who should respond?

Anyone can respond, and all responses will be considered. However HMRC would particularly welcome hearing from individuals, or professionals who may have experience of using a DoV, or those who may be considering using one.

The government is willing to meet interested groups as part of this call for evidence process. Please email ihtandtrustsconsult.car@hmrc.gsi.gov.uk if you would like to meet to discuss this issue.

6. Deadline for responses

The call for evidence will run for 12 weeks. The deadline for receiving responses is 7 October 2015.

7. How to submit your response

You can submit your response to the call for evidence by completing this short questionnaire: www.surveymonkey.com/r/T6JG2DY

Electronic copies of the questionnaire can be obtained by emailing ihtandtrustsconsult.car@hmrc.gsi.gov.uk.

Alternatively you can write to:

Deeds of Variation for Tax Purposes Review
Room G47
100 Parliament Street
London
SW1A 2BQ

The evidence provided will be analysed and the government will consider the findings.

8. Background

An individual will normally leave a will determining how their estate is to be divided between beneficiaries on their death. Alternatively where there is no will the law of intestacy will determine how the estate is to be divided.

A DoV allows a beneficiary under a will or an intestacy to re-direct part or all of the estate they have received to another person. The DoV does not actually vary the terms of the deceased’s will but operates as a gift from one person to another.

A variation cannot be made without the consent of everyone likely to be affected by it. If one of the affected persons is a minor child then their interests cannot be varied without the approval of the Court.

DoVs can be used for a number of reasons including:

• to clarify uncertainty in a poorly drafted will
• to take account of the differing fortunes of the beneficiaries (e.g. if the estate is left to children who are wealthy, they may decide to redirect some assets to more needy siblings or grandchildren, or to the surviving spouse)
• to make good an injustice or to provide for someone who was left out of a will (e.g. children giving up part of their inheritance to provide, or make better provision for a surviving ex-spouse or civil partner)
• to move the deceased’s assets into a trust

8.1 The consequences of a deed of variation for tax purposes

The tax consequences of a DoV would normally follow those that apply to a gift. However, special provision has been made for IHT and CGT, which allow the beneficiaries to elect to have the terms of a DoV ‘read back’ into the will or otherwise alter the way in which assets pass to the beneficiaries under statutory intestacy provisions.

This means that subject to meeting certain conditions, the parties to a DoV can choose that the terms of the DoV will be treated for Inheritance tax (IHT) and/or Capital Gains tax (CGT) purposes as if they been part of the deceased’s will. Such provision was first made for CGT in 1965 and for Estate Duty in 1972.

While usually it will be beneficial for the terms of a DoV to be treated as if they were made by the deceased for both IHT and CGT purposes, it is possible to opt for this treatment to apply only for one or the other.

8.2 Inheritance tax

Inheritance tax (IHT) is broadly chargeable on the estate of a deceased person above the nil rate band (currently £325,000). Transfers to spouses are exempt from IHT, as are gifts to charities and political parties. Any unused nil rate band can be transferred to a surviving spouse or civil partner, meaning that the estate of the surviving spouse or civil partner could benefit from a nil-rate band of up to £650,000 in some circumstances. IHT is also charged on gifts and certain other transfers made during a person’s lifetime if the value of the gifts or transfers exceeds the nil rate band and the donor dies within seven years of making them.

A DoV can mean that the IHT payable on the deceased’s estate is:

• increased if, for example, the value of the estate exceeds the inheritance tax nil rate band and assets in the estate are redirected away from an exempt beneficiary (such as a spouse) to a chargeable beneficiary (such as a child)

or

• decreased if, for example, assets are redirected from a chargeable person to a surviving spouse or a charity, or are used to use up any unused nil rate band, or transferable nil rate band of the deceased. Assets that qualify for reliefs such as agricultural or business property relief might also be redirected to chargeable beneficiaries to use these reliefs more efficiently.

The person who redirects the assets under a DoV is not treated as making a gift. This means that the usual IHT rules applying to lifetime gifts do not apply to transfers made under a DoV. A beneficiary making a variation does not have to survive seven years to prevent the value of the gift being added to his own estate for the purpose of calculating IHT.

Any immediate IHT charge that arises if the asset is redirected to a trust will be borne by the estate.

8.3 Capital gains tax

Capital gains tax (CGT) is charged on disposals of assets, including gifts, but is not charged when a person dies. The assets which were owned by the deceased at the date of death are treated as though they had passed to the personal representatives at their market value on that date. If an asset then passes to a beneficiary in satisfaction of a legacy, the beneficiary is also treated as if they acquired the asset at its market value at the date of death of the deceased.

The consequences of treating the terms of the DoV as if they were made by the deceased are:

• the variation is treated for CGT purposes as not being a disposal, and
• CGT applies as if the terms of variation had been included in the Will

A DoV can eliminate a CGT charge which would otherwise arise on a gift for example, if the asset has increased in value in the period between the death and date that the gift was made.