One of the things the Chancellor, George Osborne, said in his Budget speech on 18th March was: “I can also tell the House that we will conduct a review on the avoidance of inheritance tax through the use of deeds of variation. It will report by the autumn. We will seek a wide range of views.”
This gave the Chancellor the opportunity to introduce a jibe at Ed Milliband who, back in 1994 had, for tax purposes, along with his brother (and mother) entered into a “deed of variation” in respect of their late father’s estate. So George Osborne (with somewhat heavy humour) was able to say:
“We look forward to drawing on the particular expertise of the leader of the opposition. Unless, that is, the Labour party has executed its own deed of variation by then.”
A bit more about the Milliband “deed of variation”
• When Mr Milliband’s father, Ralph, died in 1994 his widow and Ed and David Milliband agreed that instead of his house all passing outright to Mrs Milliband in terms of the late Mr Milliband’s Will a 20% share of it should go to each of Ed and David.
• This arrangement was effected in accordance with express provisions in the Inheritance Tax legislation so that, for tax purposes, instead of this being a gift by Mrs Milliband to her sons it would be treated as though the gifts of a 20% share in the house had been bequeathed under the late Mr Milliband’s Will direct to his sons.
• As a result, looking to the future, the Inheritance Tax on Mrs Milliband’s death would, in principle, be less than if she had inherited the whole house and still owned it all on her death.
• Arrangements along these lines were common enough particularly in the days before the introduction (in 2007) of “transferable nil rate bands” for Inheritance Tax between spouses. Most practitioners would not have viewed such arrangements as being at the unacceptable end of tax avoidance but simply as sensible tax planning within the clear terms of legislation which expressly allowed for such arrangements.
• Nevertheless, the fact that Ed Milliband was a party to such an arrangement gave the Chancellor the scope to make the jibe. It remains to be seen how the consultation announced in the Budget will pan out. But one has to confront the possibility that the scope to make such deeds of variation may be abolished or restricted in the future. (A cynic might predict that the announcement of the consultation was primarily an opportunity for the Chancellor to make his jibe and that the consultation will not, in fact, translate into abolition or restriction of “deeds of variation”. But, of course, one cannot assume so.)
A bit more about “deeds of variation” generally
• As indicated above, a “deed of variation” is the term generally used to refer to a formal document under which those entitled to property on death (usually under someone’s Will) re-direct that property to another. It is often described as “varying the deceased’s Will”. The matter can be illustrated by way of a simple example.
• Suppose Mrs Generous inherits £50,000 as a legacy under her late aunt’s Will. Suppose Mrs Generous feels she already has enough by way of pensions and savings for her own needs but Mrs Generous’ children are in need of cash so they can put down a deposit on a house.
• Mrs Generous could, of course, simply take the legacy of £50,000 under the Will and then gift the cash to her children. But, if Mrs Generous herself then died within seven years of that gift it would, for Inheritance Tax purposes, be counted back in relation to her estate on her death. In principle it would then increase the amount of Inheritance Tax payable on her estate thereby reducing what would be left for her children under her Will.
• So, instead, what Mrs Generous could do is sign a document, appropriately worded, so that her re-directing her legacy under her aunt’s Will to her children was treated – for Inheritance Tax purposes – as though the legacy had been left direct to the children under the aunt’s Will. In that case, even if Mrs Generous died within seven years, the £50,000 would not be counted back in relation to the Inheritance Tax on her estate because the gift would be deemed to have been made by the aunt – not Mrs Generous.
• The tax legislation currently makes express provision so as to allow such arrangements in that the Inheritance Tax Act 1984 provides (emphasis added):
“142 — Alteration of dispositions taking effect on death
(1) Where within the period of two years after a person’s death—
(a) any of the dispositions (whether effected by will, under the law relating to intestacy or otherwise) of the property comprised in his estate immediately before his death are varied …
… by an instrument in writing made by … any of the persons who benefit … under the dispositions, this Act shall apply as if the variation had been effected by the deceased …”
Recommendations
The example given above in the case of Mrs Generous would probably not strike many as constituting aggressive tax avoidance. But we must wait and see what the consultation brings. It may result in the abolition or restriction of “deeds of variation”. So, we would suggest:
• that if a deed of variation is currently being considered in an estate it may be best to press ahead without delay – assuming that is possible and otherwise appropriate; and
• more generally, ensuring wills are regularly and actively reviewed because it may prove much more difficult to re-arrange things appropriately post-death than it has been in the past.
Note: This material is for information purposes only and does not constitute any form of advice or recommendation by us. You should not rely upon it in making any decisions or taking or refraining from taking any action. If you would like us to advise you on any of the matters covered in this material, please contact Lauren Booth: Lauren@mitchells-roberton.co.uk