IHT Deed of variation

RabbitMad

Hi,

I'm looking for some fairly detailed info so I'm hoping there are some bright sparks here that can help me.

Situation:
My dad, myself and 3 brothers and sisters are going to inherit (once probate granted) a private limited company worth about £250k and a ploit of land valued at £15k but with a good chance of planning permission in the future (perhaps 8 to 10 years)

Saving tax:
My Dad wants to do a deed of variation to give his inheritance to his children on the basis he currently doesn't need the money and doesn't want it in his estate for IHT when he dies. This is all well and good, but whilst he doesn't need the money now he might need it in future.

My plan had been to lend him money if he needed it but would any loan reduce the value of his estate when he pegs it? I have seen there are special rules where a gift has previously been made to someone the deceased owed money too.


My second plan is to do a deed of variation on some of my gift to my children to avoid CGT if the land gets planning permission. But whilst a deed of variation is effective for IHT and CGT its not for income tax.

So my question is if I gave my children my shares in the company and they sold the shares - would the income produced form the asset they re-invest in be taxed as my income if it exceeds £100 per year?

Any help thoughts greatly appreciated.

jimmo

As no-one else has chipped in, I am no great shakes on IHT but know a thing or two about CGT and have some experience of Deeds of Variation.
First of all, your father's intention to pass on his inheritance to his children seems straightforward enough but what puzzles me is whether your intention to pass on part of your inheritance to your (I presume minor) children is in respect of your inheritance, as it stands now or your inheritance after your father's Deed of Variation.
If anything is going to pass from your father to your children it might be better not passed through a middleman, you.

RabbitMad wrote: »

Hi,

But whilst a deed of variation is effective for IHT and CGT its not for income tax.

My guess is that you have not really understood what your read.
Just using your father and his interest in the limited company as an example, if the deceased died on 1 Jan 2010 the your father inherited a number of shares in the limited company and became eligible to any dividend income as and when it arose.
He has a maximum time of 2 years from the date of death of the deceased to make a Deed of Variation, so assuming he makes the Deed of Variation at the very last date, 1 Jan 2012, the effect of the Deed of Variation will be that the ownership of the shares will be deemed to have passed direct from the deceased to the ultimate beneficiaries on the date of death for IHT and CGT purposes but, because your father was entitled to the dividend income at the time it arose, that will remain his income and he will remain liable to Income Tax on that income.
However any dividend income that arises after the date of the Deed of Variation will, on first principles, be the income of the, then, current shareholders, not your father.
Continuing on my assumption that your children are minors anything they inherit will have to go into a trust and, as I understand it, anything that passes directly from your father to your children, albeit through a trust will become your children's income and taxable accordingly.
However anything that passes from your father, to you and then onto your children will result in you being the "settlor" on your children, not your father.
Under the aggregation of minors' income rules the income, and capital gains will be yours, not your children's.
Now, did you understand all that?
If posters who know more about IHT than I do pick holes in what I have said will you be able to follow the arguments?
Whilst it is not directly related to your problem, if you do a Search this Forum for "Mr Dog" you may get an impression of how much commitment and application is required for an amateur to successfully take on the system. It can be done, but in your case, you definitely have a 2 year deadline from the date of death of the deceased to get all Deeds of Variation in place.

antrobus

The one thing I know about Deeds of Variation is that all the beneficiaries of a Will must agree to it. So it's not a question of you or your father signing individual Deeds to reallocate your respective shares of the estate, it's a question of you, your dad, and your 3 brothers and sisters collectively agreeing to change the terms of the will. So whilst you might well work things out on the basis that your dad wants his (say) 400 shares to go to his children, and you want the 100 shares that your father is 'giving' you to go your two children, the net effect will be that you've re-written the will so that your children get 50 shares each as if they'd been named as beneficiaries in the original will.

However I think that jimmo may have a point above regarding you being deemed the settlor of any assets on your children, but according to TSEM1840 (http://www.hmrc.gov.uk/manuals/tsemmanual/tsem1840.htm) you can avoid that by making a "true disclaimer".

As is often the case, I think the best advice is not to take much notice of what us dogs have to say about the subject on the internet, and to get some proper professional advice from a solicitor who knows about this sort of thing.

RabbitMad

Thanks for your responses.

antrobus wrote: »

The one thing I know about Deeds of Variation is that all the beneficiaries of a Will must agree to it.

This was what I thought but my solicitor and what I've read says this is not the case, only those impacted by the variation need to sign.

antrobus wrote: »

However I think that jimmo may have a point above regarding you being deemed the settlor of any assets on your children, but according to TSEM1840 (http://www.hmrc.gov.uk/manuals/tsemmanual/tsem1840.htm) you can avoid that by making a "true disclaimer".

Unfortunately I would be the settlor as my children are not currently going to benefit under the will unless I get my dad to give his bit straight to my children.

what puzzles me is whether your intention to pass on part of your inheritance to your (I presume minor) children is in respect of your inheritance, as it stands now or your inheritance after your father's Deed of Variation.
If anything is going to pass from your father to your children it might be better not passed through a middleman, you.[\QUOTE]

I was planning to pass my inheritence to my children not the bit my dad will be giving to me, but understand it might be better to get my dad to give his bit straight to my children (or one of them)

My guess is that you have not really understood what your read.
...
However anything that passes from your father, to you and then onto your children will result in you being the "settlor" on your children, not your father.
Under the aggregation of minors' income rules the income, and capital gains will be yours, not your children's.[\QUOTE]

I think I do understand it. Firstly I can't vary what my father gives to me as property under a will can only be varied by 1 deed of variation and still be effective for IHT and CGT. Its the second bit I suspected and seems to have been comfirmed by the 2 replies I've received.
But what I need to know is if I gift my child (via a deed of variation) a non income bearing asset and then it is sold and re-invested in an income bearing asset is there an issue? Also is it only the original value that is considered the gift. I plan to gift them each a share in a plot of land and their share would be worth £500 but once planning permission obtained each share will be worth about £40K. Will I be taxed on any income of the £40K as my income or will it be deemed the childs?

As the director of the limited company and the executor of the Will my plan is to remove the assets from the limited company via a return of share holder capital. Then sell the assets if possible. (The assets are a couple of rental properties ) therefore sheltering the capital gains in the childrens names.

I understand this is all very complex but the numbers and amount of tax we are talking about make it worth while.

antrobus

antrobus wrote: »

The one thing I know about Deeds of Variation is that all the beneficiaries of a Will must agree to it.

RabbitMad wrote: »

This was what I thought but my solicitor and what I've read says this is not the case, only those impacted by the variation need to sign.

Well I did have a shufty around the Interweb before I posted earlier and there are a lot of sites out there that say just that. However another look see reveals that Lawson Lewis & Co, Solicitors (http://www.lawsonlewis.co.uk/deed_of_variation.htm) do say that "All parties who are affected by the proposed variation (not therefore necessarily all the beneficiaries) must be a party to and agree the Deed", so your solicitor is probably right. Which just goes to show why the advice of a real professional person is always preferable to that of us dogs off the interweb.

As far as the undoubtedly complicated settlor question I think you appreciate, that whereas you can't vary what your father gives to you, you can discuss the matter with your father, and persuade him to give it to your children instead. Of course us dogs don't know who was getting what in the first place, and what actual changes the various parties want to make, which makes it difficult to escape from generalities, but as there's a limited company involved, there are presumably some accountants floating round somewhere, it might be worthwhile running it all past their tax gurus, particularly if it is your intention to liquidate it in the immediate future.

John_Pierpoint

RabbitMad wrote: »

my solicitor and what I've read says only those impacted by the [Deed of] Variation need to sign.
[\QUOTE]

Your solicitor is right about that.

jimmo

In my work I have only ever seen a single Deed of Variation per case (deceased person). The way I read it if the deceased left his estate to 4 beneficiaries then each beneficiary could make their own Deed of Variation to re-distribute their personal inheritance and, for example, if beneficiary 1 wanted to pass his inheritance on to his children, that would have no effect on beneficiaries 2,3 and 4 and beneficiary 1 would not need to get beneficiaries 2,3 and 4 to sign up to his Deed of Variation.
However, if beneficiaries 2, 3 and 4 also wanted to pass on their inheritances to their children. it would probably make economic sense for the 4 of them to pay one solicitor to make a single Deed of Variation.
In this particular case it may be more complicated but the principle remains the same. Get the legal niceties all sorted out in one go.
Also the OP should remember that if he pays for professional help and that help proves to be wrong there is, at least, some hope of claiming redress.

getmore4less

CGT only gets wiped out on assets owned at death.

So if the plot gets planning it needs to be owned by someone dieing to avoid any CGT related to the planning if it is to be disposed once that person dies the value gets reset and can be sold without CGT(on the difference upto that point) by the benifitiaries.


Passing the plot to your kids now will just land them with a future CGT bill when they dispose.


I don't see how a DOV avoids CGT.

John_Pierpoint

jimmo wrote: »

In my work I have only ever seen a single Deed of Variation per case (deceased person). The way I read it if the deceased left his estate to 4 beneficiaries then each beneficiary could make their own Deed of Variation to re-distribute their personal inheritance and, for example, if beneficiary 1 wanted to pass his inheritance on to his children, that would have no effect on beneficiaries 2,3 and 4 and beneficiary 1 would not need to get beneficiaries 2,3 and 4 to sign up to his Deed of Variation.
However, if beneficiaries 2, 3 and 4 also wanted to pass on their inheritances to their children. it would probably make economic sense for the 4 of them to pay one solicitor to make a single Deed of Variation.
In this particular case it may be more complicated but the principle remains the same. Get the legal niceties all sorted out in one go.
Also the OP should remember that if he pays for professional help and that help proves to be wrong there is, at least, some hope of claiming redress.

I think that only one DoV per estate is allowed, but if the rest of the beneficiaries are not interested, then just the one beneficiary can set up a DoV for just his/her individual share.

jimmo

John_Pierpoint wrote: »

I think that only one DoV per estate is allowed, but if the rest of the beneficiaries are not interested, then just the one beneficiary can set up a DoV for just his/her individual share.

That may be the problem here. You think, I think but the reality is we don't know.
When my rather elderly mother dies her will states that I and my 3 siblings will each inherit a quarter share of her estate. 3 of us are already works pensioners. 2 of us are married, one is divorced and the other is a single mother. Only 1 of us gets a State Pension. 2 of us own our houses mortgage free. One of us works full time, one works part time. We all have adult children, some are married and have children of their own. One of us still has a 32 year old child living at home.
Some of us could find a Deed of Variation very tax efficient but if one of us goes it alone would that disqualify the rest of us from doing similar?
I don't know the answer but the OP's problem seems to be much more complicated than anything I and my siblings will have to face in the fullness of time.
Given that the estate is worth more than a quarter of a million pounds I think it was a nice try for the OP to ask for advice on this forum but you and I have failed to come up with a definitive solution.
The OP really should seek professional advice.

RabbitMad

getmore4less wrote: »

CGT only gets wiped out on assets owned at death.

So if the plot gets planning it needs to be owned by someone dieing to avoid any CGT related to the planning if it is to be disposed once that person dies the value gets reset and can be sold without CGT(on the difference upto that point) by the benifitiaries.


Passing the plot to your kids now will just land them with a future CGT bill when they dispose.


I don't see how a DOV avoids CGT.

It doesn't avoid it totally but does reduce it significantly

If the plot gets PP and increases to be worth approv £250K (current value = £2.5K) there will be a lot of CGT for me at 28%.

If I split it between me, wife and 3 children there will be 5x personal allowance
some of my gain will still be at 28% but the missuses should mostly scrape in at the 18% bracket. And the chidren will have the CGT allowance then their personal allowance* as they don't earn before paying 18% on the rest

so basically at least 50K worth of cgt free allowance as opposed to 10k and then a lot more at 18% as opposed to 28%


* ages since I did my taxation and trust exam so can't remember of the top of my head if capital gains get to use any unused personal allowance or if cgt is just charged at the marginal rate of tax?