TQOTW: Charitable Trust

My client died last year and left his entire estate to his wife. The widow is considering a Deed of Variation in favour of her adult children to assist with her own Inheritance Tax planning. Included in the estate is a rental property owned jointly by husband and wife and a 50% shareholding in an investment company; the other 50% shareholding being owned by the widow. I am concerned that a Deed of Variation will create an Inheritance Tax Charge and would be grateful for any solution.

A Deed of Variation is effectively a gift by a beneficiary with certain tax advantages being available. These advantages are that the gift will be treated as made by the deceased person for the following tax purposes if made within 24 months of the death and, in certain cases, only if a valid statement is included in the deed of variation:

  • Capital Gains Tax (CGT) – S62(6), (7) & (8) TCGA 1992
  • Inheritance Tax (IHT) – s142 IHTA 1984
  • Stamp Duty Land Tax (SDLT) – Paragraph 3, Sch. 3 FA 2003
  • Land & Buildings Transaction Tax (LBTT) – Paragraph 7, Sch. 1 LBTT(S)A 2013
  • Land Transaction Tax (LTT) – Paragraph 6, Sch. 3 LTTADA 2017.

The important point to note is that a statement is required to be included in the deed of variation for the CGT or IHT tax advantage to be obtained – but not for SDLT/LBTT/LTT which are automatic. Therefore it is possible to make a statement for one or both of the CGT or IHT provisions to apply; it is not compulsory for both (or any) statements to be included.

Therefore, in your scenario, the widow could enter into a deed of variation for CGT purposes but not include the IHT statement. This would mean the DOV recipients would be treated as inheriting the shares and/or half share of the property direct from the deceased – so avoiding a CGT charge for the widow by aggregation of costs with her own shares and property interest. However, by not making the IHT statement, the spouse exemption on the death is retained (as is the transferable nil rate band); the gift would be a Potentially Exempt Transfer (PET) by the widow to her children.

Such DOV planning is now becoming more relevant following the availability of the Residence Nil Rate Band which is subject to a £2m estate cap.

The SDLT/LBTT/LTT exemption availability in a DOV is often overlooked (it mirrors a similar provision that exists for Stamp Duty – Category M in SI 1987/516). In most cases there must be consideration being given for the property for SDLT/LBTT/LTT to arise. The consideration could be a similar DOV by another beneficiary i.e. beneficiaries exchanging their interests in property for other estate assets. However, a DOV is often used here to enable a rental property to be transferred to a new personal company of the beneficiary to bypass the market value consideration rule in s53 FA 2003/s22 LBTT(S)A 2013/s22 LTTADA 2017.

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David started his tax career with the Inland Revenue and then moved into practice with responsibility for the tax department of a mid-size practice. David has experience of dealing with, amongst other things, trusts and estates, HNW individuals, non-residents and both OMBs and large companies. He is qualified with the Association of Taxation Technician.

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