Deeds of variation

22/11/2010

By Mark Politz, Partner in Wills, Trusts & Tax Planning.

Deeds of variation can provide major tax planning opportunities for your clients. The recent case of Ashcroft v Barnsdale and Others illustrates the importance of obtaining expert advice on the preparation of a deed of variation.

A beneficiary may want to redirect his or her entitlement from a deceased person's estate in order to save tax or provide for someone who is in greater need of funds. A deed of variation enables a beneficiary to pass on assets in this way without making a gift for Inheritance Tax (IHT) purposes and some capital gains tax purposes, provided that certain conditions are satisfied. For example, the deed must contain the correct tax statements and it must be signed and dated within two years after the death.

A deed of variation can result in a significant tax saving. For example, Peter has inherited £200,000 from his late aunt. He can redirect assets to a discretionary trust from which Peter and his family can benefit. If this is done by a deed of variation, the assets in the trust will not form part of Peter's own taxable estate. For IHT purposes, the gift to the trust will be treated as having been made by his late aunt, rather than by Peter, so the 'gift with reservation of benefit' rules will not apply. If Peter requires funds from the trust, the trustees can make an interest-free loan, in order to avoid increasing the value of his taxable estate. The potential IHT saving on Peter's death is £80,000.

In the Ashcroft case, a deed of variation was prepared, following advice from accountants that the Will of the late Mrs Ashcroft was not IHT efficient. Unfortunately, the solicitors who prepared the deed made some errors and one important omission: they failed to provide that a legacy to the deceased's children was 'subject to Inheritance Tax'. This resulted in HM Revenue & Customs demanding additional IHT of around £33,000, as certain 'grossing up' rules applied. That sum was payable out of the assets passing to the widower. The parties then sought to correct the mistakes by signing a deed of rectification, but the Revenue would not agree to be bound by this unless it was approved by the court.

The High Court allowed the claim for rectification on the basis that the deed of variation did not record the intentions of the parties. The effect of the variation was to shift the burden of IHT from the deceased's children to her widower, which was never intended. The solicitors apparently made no notes of the meeting at which the deed of variation was originally discussed. Fortunately, other evidence of the parties' intentions was available. However, the expenses, delay and stress involved in applying to the court could have been avoided by careful drafting. 

We have significant experience in advising on and preparing deeds of variation. If you would like any further information on this subject or if you wish to discuss a possible deed of variation for any of your clients, please do not hesitate to contact a member of the team.