Post Death Changes

Question 1

When might the distribution of an estate under a Will or intestacy be considered unsatisfactory by the beneficiaries?

Answer 1

• inadequate provision has been made for a particular purpose
• too great/unwanted provision has been made for a beneficiary
• the distribution results in an undesirable tax situation

Question 2

What are the potential IHT consequences of a beneficiary immediately giving away their inheritance?

Answer 2

• they are making a PET
• IHT may be due if they die within 7 years of making it

Question 3

What are the potential CGT consequences of a beneficiary immediately giving away their inheritance?

Answer 3

• 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 4

What is a variation?

Answer 4

It 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 a Will or the intestacy rules to another person instead

Question 5

Can a variation be made in respect of part on an inheritance?

Answer 5

Yes either whole or part

Question 6

Is the original beneficiary free to determine who receives the varied inheritance?

Answer 6

Yes

Question 7

What is the effect of a successful variation?

Answer 7

The gift from the original beneficiary is read-back to the date of the deceased’s death and treated for IHT and CGT purposes as having been made by the deceased to the new beneficiary

Question 8

What conditions must a variation comply with for IHT ‘writing back’ effect to be achieved?

Answer 8

• must be made by the original beneficiary in writing
• within two years following the deceased’s death
• contains an express statement by the beneficiary confirming s 142 IHTA should apply
• not be made for consideration in money or money’s worth

Question 9

Does a beneficiary require approval from PRs to vary their entitlement under the estate?

Answer 9

No

Question 10

When will a beneficiary need the involvement of PRs in respect of variations? What will PRs be required to do?

Answer 10

PRs will need to sign variation and provide HMRC with a copy of the written variation and pay tax if the variation results in additional IHT being due.

Question 11

When can PRs refuse to sign variation?

Answer 11

If the assets held by them are insufficient to discharge the additional tax payable

Question 12

Who is able to make a variation?

Answer 12

Original beneficiaries who are not minors and who have mental capacity.

Minor beneficiaries and beneficiaries who lack mental capacity require the consent of the court under the Variation of Trusts Act 1958 to vary

Question 13

Is there a limit to the number of variations possible?

Answer 13

No limit to the number of times a Will can be varied but each asset can only be varied once.

Second variation will not be effective for tax purposes

Question 14

What property cannot be subject to a variations?

Answer 14

• property in respect of which the deceased was a life tenant immediately before death. The trust deed will determine where those assets go
• gift with reservation of benefit - although subject to IHT the gift belongs legally to someone other than deceased

Question 15

If the original beneficiary makes a variation of property but continues to enjoy the property, has the original beneficiary made a gift with reservation of benefit?

Answer 15

No because the effect of the writing back provisions is to treat the arrangement as a disposition by the deceased, the original beneficiary is not the donor of the property and therefore there can be no reservation of benefit by them

Question 16

What is a disclaimer?

Answer 16

A disclaimer is similar to a variation but operates as a refusal to accept property to which a beneficiary is entitled either under the intestacy rules or under the terms of a will

Question 17

What are the limitations to disclaimers?

Answer 17

• 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 does not disclaim their rights under any intestacy which may arise as a consequence of disclaiming their testamentary inheritance
• the inheritance passes as if the gift to the original beneficiary had failed. The ultimate destination is determined by provisions in the Will or the intestacy rules. The original beneficiary cannot control who receives the assets they disclaim

Question 18

What is the effect of a disclaimer on IHT and CGT?

Answer 18

Writing back is the same as for variation so 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 19

What is a precatory trust?

Answer 19

Arises where a gift is made to a beneficiary by will with a wish expressed as to how the beneficiary should pass on those assets

Question 20

Is a precatory trust a form of trust?

Answer 20

No due to the absence of intention. Instead just expresses wishes of testator which are not binding on the beneficiary

Question 21

Why are precatory trusts useful?

Answer 21

As they allow flexibility with regards to gifts of chattels as the testator may change their mind and update the letter of wishes without amending their Will

Question 22

What is the effect on IHT if the beneficiary acts upon the testator’s wishes under a precatory trust?

Answer 22

If distributions made within 2 years of the testator’s death then they are to be treated for IHT purposes as gifts made by testator’s will and not by original beneficiary

Question 23

Is a written election required by the original beneficiary for the IHT write back to occur for precatory trusts?

Answer 23

No - unlike variations and disclaimers, writing back effect happens automatically

Question 24

Can precatory trusts benefit from CGT writing back?

Answer 24

No so re-distribution in accordance with testator’s wishes would be treated as a disposal by original beneficiary

Question 25

Why is it unlikely to matter that there is no CGT writing back provision for precatory trusts?

Answer 25

- as likely to only be a short time between the death of the testator and the distribution by the beneficiary and - most chattels are unlikely to increase significantly in value in any event