Deed of variation in favour of a company

Can a Deed of Variation be effective for CGT/IHT purposes if the recipient is a company?

Didn't find your answer?

Is there any reason why in principle assets cannot be redirected to a company via a Deed of Variation? Does it matter whether or not the company existed at the date of the tesator’s death? This could save SDLT in the case of land as an exemption is available under Schedule 3 FA 2003 (broadly if the DoV is effective for CGT/IHT) which trumps the market value rule under s53 FA 2003.

Replies (24)

Please login or register to join the discussion.

avatar
By Justin Bryant
12th Apr 2018 10:20

I recall looking at that and couldn't see any reason why the SDLT relief would not apply, but you need to worry about corporation tax on the gift. A post death trust is fine per the comments in the link below:

http://trustsdiscussionforum.co.uk/t/deed-of-variation-into-a-discretion...

What’s important is that the trust exists before the execution of the DoV, so I think the company would not need to exist at the death date.

So maybe you can use an offshore tax haven company? I could be talking rubbish though if anyone wants to correct me.

Thanks (0)
Replying to Justin Bryant:
Portia profile image
By Portia Nina Levin
12th Apr 2018 10:59

Justin Bryant wrote:

So maybe you can use an offshore tax haven company? I could be talking rubbish though if anyone wants to correct me.

What is the purpose of this transfer of an asset to a person abroad, Justin?

If the beneficiary is going to be the owner of the company, and the asset is going to produce income, then that income will remain taxable on the beneficiary by virtue of ITTOIA 2005, s 624.

Thanks (0)
Replying to Portia Nina Levin:
avatar
By Justin Bryant
12th Apr 2018 11:06

Yes; I am well aware of TAA/settlements legislation and I did not say that it avoided that did I? The question is re SDLT and (implicitly) any potential (significant) downside and the aforementioned anti-avoidance provisions are not necessarily a downside are they all else being equal re any SDLT saving if that's what's desired? Furthermore, these could be non-UK residents etc. (I assume you've been away as you've not goaded me for a while!)

Thanks (0)
Replying to Portia Nina Levin:
Galaxian
By Galaxian
12th Apr 2018 11:10

So a DoV is "an arrangement" of which the original beneficiary is the settlor. I see you have a point. Have you seen HMRC arguing this point in this particular context?

Thanks (0)
Replying to Galaxian:
avatar
By Justin Bryant
12th Apr 2018 11:22

The DoV is only retrospective for CGT/IHT, so you should assume settlements legislation applies (assuming usual conditions are met) unless some clever person can explain why it doesn't apply.

Thanks (1)
Replying to Galaxian:
Portia profile image
By Portia Nina Levin
12th Apr 2018 11:23

I've never seen anybody try this. I'd have expected HMRC to pick up on this pre-merger, but nowadays there's a very good chance that it will only ever be looked at by clueless fuchwits. That doesn't make it god advice IMO though.

Thanks (1)
Replying to Justin Bryant:
Galaxian
By Galaxian
12th Apr 2018 11:07

I'm happy that a new trust can be created through a DoV but a company must be incorporated first which involves an additional step. This is a concern (as is s624 re my comments to Portia Nina Levin).

Thanks (0)
Replying to Galaxian:
avatar
By Tax Dragon
14th Apr 2018 08:55

Galaxian wrote:

I'm happy that a new trust can be created through a DoV but a company must be incorporated first which involves an additional step. This is a concern (as is s624 re my comments to Portia Nina Levin).


I'd like to see your point here answered. It's possible to pass assets to as yet unborn grandchildren, but only via a trust. Could it be that an 'unborn' company could inherit only via a similar mechanism (and not directly, as Justin suggests)?
Thanks (0)
avatar
By Justin Bryant
12th Apr 2018 11:36

For completeness, although the associated operations rules in TAA may apply to the DoV, since the transferor is dead presumably only the beneficiary charge can apply (if surviving spouse excluded). See:

https://books.google.co.uk/books?id=Kw37z_mm7A8C&pg=PA478&lpg=PA478&dq=a...

[Edit] The above point is only correct without a DoV i.e. under an original unamended will (since per my above comment it's not retrospective re IT).

Thanks (0)
Replying to Justin Bryant:
Portia profile image
By Portia Nina Levin
12th Apr 2018 11:26

For income tax purposes, the transferor is the beneficiary. The DoV being treated as the deceased's disposition is a fiction that only applies for CGT and IHT purposes, and causes the SDLT exemption to apply.

A DoV is a settlement by the person who would have received the asset but hasn't because they have signed up to the DoV.

Thanks (0)
Replying to Portia Nina Levin:
Galaxian
By Galaxian
12th Apr 2018 11:31

Agreed. The original beneficiary would be providing bounty.

Thanks (0)
Replying to Portia Nina Levin:
avatar
By Justin Bryant
12th Apr 2018 11:32

Yes, I agree (I was seemingly disagreeing with myself above!)

Thanks (0)
avatar
By Justin Bryant
12th Apr 2018 13:10

Actually, the Levy case in the link below suggests there is no bounty and the settlements legislation should not be a problem (if accounted for by the company as a shareholder capital contribution say rather than a gift - it cannot issue shares etc. per s142(3) IHTA 1984 and https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm35100 and of course para 4(2)(b) Sch 3 FA 2003).

http://www.uniset.ca/other/cs4/56TC68.html

Example 5 in the link below seems consistent with that:

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14334

Thanks (0)
Replying to Justin Bryant:
Galaxian
By Galaxian
12th Apr 2018 14:25

Subject to further research I'm not convinced the Levy case is helpful. This involved an interest free, but repayable on demand, loan to the company in which he was the 99% shareholder - two points of this case spring to mind:

a) There was no bounty because there was a compensating advantage to himself
b) The loan was repayable on demand (so arguably was worth face value)

My case involves 5 siblings who are equal residual beneficiaries under their father's Will but wouldn't own the company equally because some want to take 100% ownership of specific assets of the estate.

Additionally there is no reading back for income tax purposes (the original beneficiaries are the settlors) and I'm not sure what a GWR has to do with the issue.

Thanks (0)
Replying to Galaxian:
avatar
By Justin Bryant
12th Apr 2018 14:52

The lack of GWR in HMRC's above example suggest there's no bounty i.e. it supports Levy. Clearly there needs to be an equality of treatment re the variation and corresponding increase in share value per Levy (which is also the case re forgone interest, so I see no reason why that's not supportive as share price goes up to compensate and eliminate bounty in both cases).

Thanks (0)
Replying to Justin Bryant:
Portia profile image
By Portia Nina Levin
12th Apr 2018 15:14

Or they're just suggesting that there's no reservation of benefit...

They're examples demonstrating exclusion of the donor.

Thanks (0)
Replying to Portia Nina Levin:
avatar
By Justin Bryant
12th Apr 2018 15:27

But clearly the shareholder benefits from the shares, so I don't think so. When you start being insulting it can be amusing, but it rather suggests that I'm right and you're wrong if insults is all you have to argue with.

Thanks (0)
Replying to Justin Bryant:
Galaxian
By Galaxian
12th Apr 2018 16:03

The example seems redundant in any event since surely it is not a transfer of value as there is no intention to confer a gratuitous benefit (S10 IHTA 1984).

.

Thanks (0)
Replying to Galaxian:
avatar
By Justin Bryant
12th Apr 2018 16:23

That's precisely my no bounty point!

Thanks (0)
Replying to Justin Bryant:
Galaxian
By Galaxian
13th Apr 2018 07:27

Under s10 it might not be a transfer of value but it is still a disposition.

Coming back to my earlier comments about the siblings owning the company in different proportions suggests that an original beneficiary ‘losing out’ has possibly conferred bounty (although looking at the bigger picture he has gained by receiving a greater share of other estate assets).

A DoV won’t involve any loan, taken in isolation it involves a gift by the original beneficiary losing out (no reading back for income tax purposes). However, looking at the matter in the round all siblings are walking away with an equal share of the estate in value terms. Looking at it in this way nobody has conferred any bounty surely?

Thanks (0)
Replying to Galaxian:
avatar
By Justin Bryant
13th Apr 2018 11:13

Yes, I agree and reflecting on the link below the IHTM is supportive after all, as it considers what is a gift rather than what is a ToV:

https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14315

Also, issuing shares in return would not be bounteous, so I see no reason why a capital contribution is different, since in both cases the economic effect for the shareholder is the same i.e. the value of shares increases correspondingly.

Thanks (0)
Replying to Galaxian:
Portia profile image
By Portia Nina Levin
12th Apr 2018 16:58

There is a gratuitous benefit being conferred on the company. There probably isn't a transfer of value in the example though because the transferor's estate is not diminished.

Thanks (0)
Replying to Portia Nina Levin:
avatar
By Justin Bryant
12th Apr 2018 17:08

OK, the IHTM is not conclusive re the no bounty point I agree (but it is also not unhelpful), but the Levy case is still very helpful there (and I see no reason why it makes a difference that you get shares issued as consideration (definitely no bounty) rather than making a capital contribution as the economic effect re your share value is the same).

Thanks (0)
Replying to Galaxian:
Portia profile image
By Portia Nina Levin
12th Apr 2018 15:14

On any given day, there's a strong possibility that Justin's talking complete b0110x. Particularly days with the letter d in them.

Thanks (0)