Carry on Varying!

The good and not-so-good news on variations of wills served up by RALPH RAY FTII, TEP, BSc (Econ), solicitor, consultant with Wilsons of Salisbury.

AN INTERESTING ANNOUNCEMENT was published in a press release on Budget day this year which read as follows:

Official blessings

First then the good news: it appears that the Government, and presumably the Revenue, wishes to be helpful in a controversial area. After all in the Budget and Finance Bill 1989 variations of wills made under section 142, Inheritance Tax Act 1984, etc., were to be severely curtailed although in a statement by the then Financial Secretary to the Treasury, Norman Lamont, on 20 June 1989 these proposals were abandoned, but with a warning that he would be keeping the matter under review. A more targeted specific measure to counter abuse was planned 'next year'!

Fortunately subsequent Finance Acts have not contained any anti-avoidance provisions restricting the use of variations. On the contrary this year's Budget includes a helpful provision. However, do not be too jubilant; the 2002 Budget proposals are merely administrative, under the general head of capital gains tax simplification.

Either or both

A further piece of good news is that there is nothing to indicate that an election must be made for both taxes, i.e. inheritance tax and capital gains tax. This seems to be the case for two reasons. If the election is written within the instrument itself, it can be made clear specifically that the election is to operate for one tax only; for example for inheritance tax alone under section 142(2), Inheritance Tax Act 1984 or for capital gains tax alone under section 62(6), Taxation of Chargeable Gains Act 1992. Secondly, it is common practice, for reasons referred to below, for the election not to be included in the instrument itself but by way of separate notice of election, albeit essentially within six months of the instrument of variation.

Choose wisely

What can possibly be the not so good news? Only that it seems one could inadvertently elect for both taxes when that is not in the interest of the taxpayer making the variation or the deceased's estate. For example it may well be advantageous to elect for inheritance tax but not for capital gains tax where:

More generally, for capital gains tax there is normally an exemption on death, plus a market value uplift. The motive for a variation is therefore usually to mitigate inheritance tax and not necessarily capital gains tax.

Think before you act

The incentive to elect in the instrument itself may itself contain another element of bad news. When the variation is made within the two-year period, there may be some doubt as to whether, under section 142, Inheritance Tax Act 1984, the transfer of value should be made retrospective as if made by the deceased or whether, on the other hand, the beneficiary should make a potentially exempt transfer. In the case of such doubt, making the election outside the instrument, albeit within six months of its date, creates a further degree of flexibility.

The reason for areas of doubt may arise from the need to agree values with the Revenue; to establish whether or not the asset is recognised as business or agricultural property for inheritance tax (if it is, one should normally elect because in the hands of the beneficiary it may not be - if the asset is not so recognised by the Revenue - or there is doubt, - it may be better for the beneficiary to make a potentially exempt transfer). It can also be relevant that the beneficiary is the widow or widower of the deceased.

What I am emphasising is that the temptation automatically to elect for both taxes (e.g. by way of a newly-drafted precedent) may be inappropriate - even negligent.

The new statutory provisions

In examining the more specific provisions in the Finance Bill 2002, various additional aspects come to light on an initial review of the proposed legislation. (By way of caveat the last paragraph below is stressed!)

Clause 117 of the Bill deals with inheritance tax, and clause 51 with capital gains tax. The instrument effecting the variation must itself contain a 'statement' (no longer strictly an 'election') made by all 'the relevant persons' - see below - if section 142, Inheritance Tax Act 1984 and/or section 62, Taxation of Chargeable Gains Act 1992 is to apply. As mentioned above, it no longer seems possible to make the election/statement outside the instrument.

From 1 August 2002 delivery or notification to the Board of Inland Revenue will be required only if additional tax is payable as a result of the variation; for example where a widow does a variation above the nil rate band amount to a grandchild. No notification is required it seems where, say, a son does a variation in favour of his daughter; in that case it seems that the mere statement in the variation suffices and the Revenue is not directly concerned.

The 'relevant persons' referred to above are the beneficiaries making the variation; and the personal representatives if, but only if, additional tax is payable. The wording of the 'statement' should exactly follow the statutory wording.

The capital gains tax position under clause 51 of the Bill follows a similar form.

Beneficiaries wishing to effect a variation must carefully consider whether it is to apply:

Who is 'the Board'? According to the Law Society's Gazette of 2 December 1981 and long standing practice for inheritance tax, it is the Capital Taxes Office; for capital gains tax it is the local Inspector of Taxes. It should suffice if a certified true copy of the instrument of variation is sent.

The last word

The heading to Taxation's Budget supplement has a note. 'It must be remembered that these proposals are subject to amendment during the passage of the Finance Bill'. How true that may be, and thus I may yet have the chance to revisit this fascinating(?) subject.

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