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Fifteen months ago Mr K died and by his will appointed his widow as sole executrix and beneficiary. Almost all assets were jointly owned including the home held as joint tenant. The estate has been fully administered and the home sold for £630,000. The contract for sale was signed by the widow. £200,000 has been given to the children and the widow has retained the remainder.
Fifteen months ago Mr K died and by his will appointed his widow as sole executrix and beneficiary. Almost all assets were jointly owned including the home held as joint tenant. The estate has been fully administered and the home sold for £630,000. The contract for sale was signed by the widow. £200,000 has been given to the children and the widow has retained the remainder.
Section 142(6), Inheritance Tax Act 1984 appears to permit deeds of variation made within the two years following death to be valid, despite the fact that the estate has been fully administered. Is it possible by deed of variation to sever the joint tenancy of the home so that at death Mr K will be deemed to hold it as tenant in common and create cash legacies to the children totalling £234,000 with residue to the widow? The sale of the home has already occurred and will pre-date any deed of variation.
(Query T15,907) – Woldul.
The Inland Revenue takes the view that a joint tenancy can be severed for the purposes of section 142(1)(a), Inheritance Tax Act 1984, on the basis that this transaction comes within the words 'or otherwise': see Tax Bulletin 19 (October 1995).
The same reasoning would also apply to section 62(6), Taxation of Chargeable Gains Act 1992, without which any gain made since death would be assessable on the surviving joint tenant.
The recent Special Commissioner's decision, Jerome v Kelly [2001] SpC 284, cannot be called in aid by the Inland Revenue to override this specific statutory provision, even though, in paragraph 42 of that decision, it appears to have been thought that the contractual relationship between the vendors of record and the purchaser was the determining factor in relation to changes in beneficial ownership between contract and completion behind the curtain of the statutory trust for sale (now a trust of land, but nothing turns on that).
In the circumstances set out by 'Woldul', the technical position would be even worse because the beneficial ownership would have followed the conveyancing formalities, i.e. the widow would have sold as beneficial owner.
This leads to the problem of how a joint tenancy can be severed retrospectively for the purposes of sections 142(1)(a) and 62(6). Normally it is the service of a notice by one party upon the other which is decisive. This cannot be done retrospectively and the form the documentation would have to take would, therefore, be a deed between the surviving widow and the personal representatives of the husband deeming this to have been done both in equity and for the purposes of the tax legislation.
Such deeds are normally entered into before the sale of the property and the purposes for which the deed is to take effect need to be specified so that the efficacy of the sale cannot be impugned.
Section 142(6) also permits a deed of variation to be entered into after the administration of the estate has been completed. Although this is not stated in that provision, the Revenue has not disputed, in the past, that assets which have been disposed of can be the subject of a deed of variation.
It will also be necessary for the deed severing the joint tenancy to go on to make provision for the proposed pecuniary legacies by the inclusion of provisions varying the terms of the husband's will. – WjdeS.
Provided that the variation takes place within two years from the death, it is irrelevant whether the administration of the estate is complete or the property concerned has been distributed in accordance with the original dispositions.
A joint interest can be the subject matter of a variation under section 142 because the words 'or otherwise' in section 142(1) are wide enough to include interests passing by survivorship. The Revenue has confirmed this view in the Revenue Interpretation of October 1995.
The widow can effect a variation redirecting Mr K's half share and create legacies of the nil rate band as suggested, but should be aware of the effect of capital gains tax on the sale, since Mr K's share now forms part of his estate and no longer has the benefit of principal private residence relief. To avoid this, 'Woldul' should utilise arrangements involving a gift of a legacy to a nil rate band discretionary trust, the legacy being in the form of a charge on the property. – Black Dog.
Extract from reply by 'Percy Lion':
The widow (the person benefiting from the disposition on death) should enter into the necessary deed of variation with the children (assuming that they are not minors), the operative provisions being as follows:
(1) deemed severance of the joint tenancy immediately before death;
(2) will to include legacies totalling £234,000 to named children;
(3) widow agrees to pay sums equivalent to the value of the legacies to the children;
(4) children agree that receipt of the equivalent sums operates as a complete discharge of the personal representative's obligations to honour the terms of the will;
(5) election under section 142(2), Inheritance Tax Act 1984;
(6) exempt from stamp duty certificate (category L).
As the property has been sold and, assuming that the capital gains tax private residence exemption applied, there should be no election for the variation to have retrospective effect for the purposes of that tax. If the children are minors, then the income tax settlement provisions would apply to the sums paid by the widow to them. The widow should pay the balance of £34,000 by cheque, and a certified copy of the variation should be sent to the Capital Taxes Office. Effectively Mrs K's estate is now £234,000 less and her own nil rate band is intact.
