Chapter: 2 - Inheritance Tax Mitigation: The Basics

Post-death rearrangements

2.13.2

Suppose that, in IHT terms at least, the deceased did not ‘get it right first time’ – or even at all.  What then?  Whether or not a reasonably drawn Will was left, there are three statutory possibilities open to the beneficiaries so as to rewrite the provisions of the Will or indeed intestacy for IHT purposes. 

(a)   Written variations or disclaimers
The beneficiary, being of full age and capacity, can within two years after death redirect the entitlement, whether as a share in residue or a specific gift, to another beneficiary or indeed to trustees (IHTA 1984 s142).  Providing the technicalities are observed, and certain anti-avoidance rules sidestepped, this takes effect as if it had been effected by the deceased’s Will.  A similar point applies where a beneficiary ‘disclaims’ the original gift, though a disclaimer cannot be made in favour of a specific person; rather the destination of the gift depends on the terms of the Will or intestacy and the property will go to the person next in line.  The making of a variation or disclaimer will generally not constitute a disposal for CGT purposes.  Otherwise, however, the reliefs take effect for IHT only and the disposition which is occasioned by the variation or disclaimer will carry the normal CGT and Income Tax consequences. 

(b)   Precatory trusts
A husband might leave his personal possessions to his wife but express the wish that within two years after death she makes certain redirections of specified chattels to particular individuals.  If she does this in accordance with the wishes (which may be written or oral) the ultimate beneficiary is treated as the person entitled in the estate (IHTA 1984 s143).  This can be quite a convenient and indeed is a common, way of dealing with chattels under a Will to cater for example with acquisitions of further chattels etc without the need to make a new Will each time.  However, what is on the face of it a relieving provision can carry a trap in the context of the transferable nil-rate band (see 18.4.3(g)).

(c)   Appointments out of relevant property trusts within two years of death
A person might leave either his whole estate or a nil-rate band gift on discretionary trusts.  If within two years after the death but before any right to income has arisen the trustees appoint any or all of those assets either to individuals outright or to other trustees, the normal exit charge on property leaving a relevant property trust is disapplied: see 2.3.3(a)(ii) and 4.7.5  (IHTA 1984 s144).  Typically, trustees would so act in accordance with a fairly detailed (and regularly reviewed) letter of wishes from the deceased as to how they should exercise their discretion.  But this can in appropriate circumstances be quite a good way of dealing with the disposition of assets owned by the deceased when circumstances are likely to change between making the Will and the date of death, and indeed, where there is a surviving spouse/civil partner, of maximising that relief as well as generally providing best for the family.  New express rules were introduced by FA 2006. 

All these options are explored further in Chapter 19.