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25 February 2002
Unvariable will?
Unvariable will?
We act for an estate where the will purports to give discretion to the trustees for a period of two years from death, to appoint part or the whole of the trust fund upon trust for such one or more of a group of beneficiaries including the widow, children and remoter issue of the deceased. Pending exercise of such power of appointment, the trustees shall pay the income to the wife. The residuary clause states that in default of and subject to any power of appointment, the income is to go to the wife and thereafter capital and income for such of the children as survive the testator in equal shares.
We are instructed to use the nil rate band available to the deceased. At present, this is subject to agreement by the Revenue of a considerable amount of gifts during life for which we have claimed relief under section 21, Inheritance Tax Act 1984. The problem is that the provisions of the will, stating that pending the appointment out of funds the wife is entitled to income, give her an immediate interest in possession on the death of the husband. As such, section 144 will not apply.
It would be difficult to see how a deed of variation can be undertaken initially using section 142, unless we can ignore the trustees' powers. By ignoring the clause, we could have the children and the widow simply all join in as parties to a deed of variation whereby there is a nil rate band gift of cash to the children. Is this possible? Would it be possible for the trustees to join in the variation to confirm that they are not to exercise their power?
On the assumption that life is not that simple, could the trustees appoint the entire estate to the widow absolutely using their powers of appointment within the will, and thereafter the widow within the two-year period using section 142 to vary the terms of the will following the appointment, creating a nil rate band gift to the children in that way?
Presumably the Revenue may wish to contend that Ramsay applies. Furthermore, could readers please confirm the capital gains tax position arising out of the initial appointment, bearing in mind that this will not be read back to date of death.
(Query T15,960) - Weaver.
It is possible to make a variation in this estate and make a successful election under section 142. The wife is said to be entitled to the income pending exercise of the power of appointment. Therefore, unless and until the power of appointment is exercised, she has an interest in possession. If someone else had the interest in possession (at least in an amount equivalent to the nil rate band), that would allow a variation to make use of the nil rate band, albeit not as a mini-discretionary trust. However, 'Weaver' seems to be contemplating an outright nil rate band gift to the children. That would be easy enough. The widower would simply assign her life interest dressed up as a deed of variation. The capital would not need to be dealt with by the deed of variation. Separately and outside the deed of variation the trustees could then exercise their power to advance the underlying capital to the children.
For what it is worth, I think the trustees could join in the variation to release their power of appointment, though, depending on quite how the power of appointment is drafted, they may or may not be able to do so. But for the reason above the question is academic.
It would be pointless the trustees appointing the entire estate to the widow and then the widow trying to use section 142. She would not be varying the dispositions of the estate. While one can vary (and elect under section 142) where there has been a section 144 appointment, the situation is not the same where the appointment is not a section 144 appointment, as the deeming which goes with a section 144 appointment is absent. - Robin Hood.
It is sometimes easy to forget that, as we have recently been reminded by the Capital Taxes Office, a deed of variation has to operate in the 'real world', and should therefore conform with property and trust law principles.
A consequence of this is that those who wish to effect a variation to an entitlement can only do so if there is a vested entitlement to the inheritance or by joining in all those potentially entitled to the inheritance to consent to the variation. Whilst it is the case that interests declared in default of the exercise of a power of appointment can vest at a testator's death, such interests are subject to divesting by the exercise of the power; it follows that all potential appointees would be required to consent to the deed of variation in the present case (Saunders v Vautier [1841] 10 LJ Ch 354) whilst the power remains extant.
If, as seems likely here, this is not feasible or possible (because, for example, of minor interests), the trustees might consider surrendering the power of appointment so that it is extinguished. However, the power is likely to be a fiduciary power and it is not possible to surrender a fiduciary power unless the trust instrument expressly authorises this; a fortiori as far as the proposal that the power simply be ignored. The second alternative is to exercise the power; if this is done irrevocably then it crystallises the remainder beneficiaries and exhausts the power. Care is required here as far as the trustees are concerned; there is no reason why they should not consider exercising the power to benefit the deceased's widow absolutely (we are not told if the widow is a trustee, but, if she is, consider whether the will permits the trustees to exercise the power of appointment to benefit one of their number personally), but the trustees would be well advised not to forget their trust law obligations in the exercise of the power and in particular should not overlook the doctrine of fraud on a power.
Subject to that, there seems to be no reason why the widow should not then take the opportunity to vary the entitlement as appointed to her before the second anniversary of her husband's death, creating the nil rate band gift for her children in the manner suggested. Such a step ought not to offend the prohibition against multiple variations (Russell and another v Commissioners of Inland Revenue [1988] STC 195) as there is only one variation - the widow's - operating over the appointed entitlement. This seems to find support at paragraph P43 of the Capital Taxes Office Advanced Instruction Manual where it is stated that the exercise of a power of advancement is not a variation for the purposes of section 142, Inheritance Tax Act 1984 so that any subsequent redirection by the beneficiary may qualify as a section 142 variation.
One should, however, anticipate some enquiry from the Capital Taxes Office, and it is suggested that the likely issues are best addressed in advance by the trustees in their earlier deliberations leading to the appointment; many of the factors that the trustees will need to have considered in the context of the fraud on a power issue will be relevant in dealing with the possible operation of Ramsay for which the Capital Taxes Office might wish to contend, the argument being that the whole arrangement comprising the trustees' appointment and the later deed of variation is vitiated by application of the Ramsay principle.
However, it is suggested that the decision in Fitzwilliam and others v Commissioners of Inland Revenue [1993] STC 502 should assist a contention that the Ramsay principles cannot apply to the action being taken here. In essence, the position should be that the appointment to the widow in the first instance carries with it income tax and potential inheritance tax consequences for the widow for as long as she is entitled to the appointed property; this makes it impossible to ignore the widow's intermediate entitlement, and it is only if one can ignore such entitlement that Ramsay can have any application. - Digby Bew.
Editorial note. An appointment by the executors would not benefit from the relief under section 144, Inheritance Tax Act 1984 because that relief requires that no interest in possession has subsisted in the property concerned. The solution here may lie in section 142(4) of that Act; this relates to variations which result in trusts ceasing within two years of the death with distribution of the property at that time then treated as being made at the date of death.
We act for an estate where the will purports to give discretion to the trustees for a period of two years from death, to appoint part or the whole of the trust fund upon trust for such one or more of a group of beneficiaries including the widow, children and remoter issue of the deceased. Pending exercise of such power of appointment, the trustees shall pay the income to the wife. The residuary clause states that in default of and subject to any power of appointment, the income is to go to the wife and thereafter capital and income for such of the children as survive the testator in equal shares.
We are instructed to use the nil rate band available to the deceased. At present, this is subject to agreement by the Revenue of a considerable amount of gifts during life for which we have claimed relief under section 21, Inheritance Tax Act 1984. The problem is that the provisions of the will, stating that pending the appointment out of funds the wife is entitled to income, give her an immediate interest in possession on the death of the husband. As such, section 144 will not apply.
It would be difficult to see how a deed of variation can be undertaken initially using section 142, unless we can ignore the trustees' powers. By ignoring the clause, we could have the children and the widow simply all join in as parties to a deed of variation whereby there is a nil rate band gift of cash to the children. Is this possible? Would it be possible for the trustees to join in the variation to confirm that they are not to exercise their power?
On the assumption that life is not that simple, could the trustees appoint the entire estate to the widow absolutely using their powers of appointment within the will, and thereafter the widow within the two-year period using section 142 to vary the terms of the will following the appointment, creating a nil rate band gift to the children in that way?
Presumably the Revenue may wish to contend that Ramsay applies. Furthermore, could readers please confirm the capital gains tax position arising out of the initial appointment, bearing in mind that this will not be read back to date of death.
(Query T15,960) - Weaver.
It is possible to make a variation in this estate and make a successful election under section 142. The wife is said to be entitled to the income pending exercise of the power of appointment. Therefore, unless and until the power of appointment is exercised, she has an interest in possession. If someone else had the interest in possession (at least in an amount equivalent to the nil rate band), that would allow a variation to make use of the nil rate band, albeit not as a mini-discretionary trust. However, 'Weaver' seems to be contemplating an outright nil rate band gift to the children. That would be easy enough. The widower would simply assign her life interest dressed up as a deed of variation. The capital would not need to be dealt with by the deed of variation. Separately and outside the deed of variation the trustees could then exercise their power to advance the underlying capital to the children.
For what it is worth, I think the trustees could join in the variation to release their power of appointment, though, depending on quite how the power of appointment is drafted, they may or may not be able to do so. But for the reason above the question is academic.
It would be pointless the trustees appointing the entire estate to the widow and then the widow trying to use section 142. She would not be varying the dispositions of the estate. While one can vary (and elect under section 142) where there has been a section 144 appointment, the situation is not the same where the appointment is not a section 144 appointment, as the deeming which goes with a section 144 appointment is absent. - Robin Hood.
It is sometimes easy to forget that, as we have recently been reminded by the Capital Taxes Office, a deed of variation has to operate in the 'real world', and should therefore conform with property and trust law principles.
A consequence of this is that those who wish to effect a variation to an entitlement can only do so if there is a vested entitlement to the inheritance or by joining in all those potentially entitled to the inheritance to consent to the variation. Whilst it is the case that interests declared in default of the exercise of a power of appointment can vest at a testator's death, such interests are subject to divesting by the exercise of the power; it follows that all potential appointees would be required to consent to the deed of variation in the present case (Saunders v Vautier [1841] 10 LJ Ch 354) whilst the power remains extant.
If, as seems likely here, this is not feasible or possible (because, for example, of minor interests), the trustees might consider surrendering the power of appointment so that it is extinguished. However, the power is likely to be a fiduciary power and it is not possible to surrender a fiduciary power unless the trust instrument expressly authorises this; a fortiori as far as the proposal that the power simply be ignored. The second alternative is to exercise the power; if this is done irrevocably then it crystallises the remainder beneficiaries and exhausts the power. Care is required here as far as the trustees are concerned; there is no reason why they should not consider exercising the power to benefit the deceased's widow absolutely (we are not told if the widow is a trustee, but, if she is, consider whether the will permits the trustees to exercise the power of appointment to benefit one of their number personally), but the trustees would be well advised not to forget their trust law obligations in the exercise of the power and in particular should not overlook the doctrine of fraud on a power.
Subject to that, there seems to be no reason why the widow should not then take the opportunity to vary the entitlement as appointed to her before the second anniversary of her husband's death, creating the nil rate band gift for her children in the manner suggested. Such a step ought not to offend the prohibition against multiple variations (Russell and another v Commissioners of Inland Revenue [1988] STC 195) as there is only one variation - the widow's - operating over the appointed entitlement. This seems to find support at paragraph P43 of the Capital Taxes Office Advanced Instruction Manual where it is stated that the exercise of a power of advancement is not a variation for the purposes of section 142, Inheritance Tax Act 1984 so that any subsequent redirection by the beneficiary may qualify as a section 142 variation.
One should, however, anticipate some enquiry from the Capital Taxes Office, and it is suggested that the likely issues are best addressed in advance by the trustees in their earlier deliberations leading to the appointment; many of the factors that the trustees will need to have considered in the context of the fraud on a power issue will be relevant in dealing with the possible operation of Ramsay for which the Capital Taxes Office might wish to contend, the argument being that the whole arrangement comprising the trustees' appointment and the later deed of variation is vitiated by application of the Ramsay principle.
However, it is suggested that the decision in Fitzwilliam and others v Commissioners of Inland Revenue [1993] STC 502 should assist a contention that the Ramsay principles cannot apply to the action being taken here. In essence, the position should be that the appointment to the widow in the first instance carries with it income tax and potential inheritance tax consequences for the widow for as long as she is entitled to the appointed property; this makes it impossible to ignore the widow's intermediate entitlement, and it is only if one can ignore such entitlement that Ramsay can have any application. - Digby Bew.
Editorial note. An appointment by the executors would not benefit from the relief under section 144, Inheritance Tax Act 1984 because that relief requires that no interest in possession has subsisted in the property concerned. The solution here may lie in section 142(4) of that Act; this relates to variations which result in trusts ceasing within two years of the death with distribution of the property at that time then treated as being made at the date of death.
