Instruments of Variation - Current Issues Update

Interest on gifts under an IoV

The right, or otherwise, to interest on a cash sum gifted by an Instrument of Variation is not clearly defined.

Often, neither the person making the IoV thinks of the point, nor does their adviser raise it, instead concentrating on the inheritance tax aspects.

Where a cash gift is clearly defined as a “legacy”, either by the notional incorporation of an additional clause in the will, or by the setting out of a fictional will within the IoV, in the absence of any direction to the contrary, that gift may well carry the right to interest as though it were a general legacy. However, as the gift cannot be paid before it arises under the IoV, any right to interest can only run from the date of the IoV, if at all.[fn]Applying Re Scadding (1902) 4 OLR 632[/fn]

Where the gift is not given the character of a “legacy” then it is likely it will be treated as a simple cash gift, not carrying any right to income before payment.

When discussing an IoV, the original beneficiary and their advisers should also consider if interest should be paid on any gift made by the IoV and the instrument drafted to reflect the beneficiary’s intentions. This could take the form of “Provided that no such sum shall carry the right to interest or income before its actual date of payment”.

Original beneficiary’s income rights

Unless the variation provides otherwise, the original beneficiary retains the right to receive the income under the will, etc., up to the date of the variation.

Where a gift is made out of a specific legacy or devise, the income/interest up to the date of the variation remains that of the original beneficiary for income tax purposes regardless of its treatment under the variation.

In those cases where the gift is made out of residue, for income tax purposes the interest/income will be that of the original beneficiary to the extent that it can be identified with any distribution made to him/her on account of that entitlement [fn]s.660 Income Tax (Trading and Other Income) Act 2005[/fn], regardless of whether it subsequently pass elsewhere under the terms of the variation.

Variations involving discretionary trusts

With the large number of discretionary trusts created by will, questions frequently arise as to whether it is possible to use an IoV to vary the terms of the trust.

The answer is a heavily qualified “Yes” – provided that all the potential objects of that trust are ascertainable and of legal capacity (by analogy to the Rule in Saunders v. Vautier (1841) [fn]4 Beav. 115.[/fn], and applying Re Brockbank (1948) [fn]1 All E. R. 287.[/fn].

If there are minors or unborn members of the class, then any such variation would require the consent of the court under s.1 Variation of Trusts Act 1958. That the current members of the class might be of legal capacity does not enable them potentially to extinguish the rights of future members of the class.

Where the class has not closed, in order to enable a variation to take place the executors/trustees might appoint the trust fund to one or more of the objects with a view to them making the variation. HMRC has indicated that it is satisfied any such arrangement will be within both s.144 IHTA 1984 and s.142 IHTA 1984, although the executors/trustees will need to consider if such arrangement would constitute a fraud on the power. [fn]Wong v. Burt [2005] WTLR 291 (CA).[/fn]

Where, within two years of death, it appears that there is no need for the discretionary trusts in the Will it is more appropriate to utilise s.144 IHTA 1984 to appoint out the trust assets. If the appointment was to the surviving spouse it would enable the personal representatives of the surviving spouse to claim (under s.8A IHTA 1984) the available transferable Nil Rate Band from the estate of the first spouse to die.