11 June 2015

Deed of Variation — getting it wrong

Paul Hewitt
Partner | UK

The case of Vaughan-Jones v Vaughan-Jones illustrates two ways to get a deed of variation badly wrong.

Mr Vaughan-Jones died in October 2007. In his Will he appointed one of his three sons and his accountant as executors. He divided residue into four equal shares between his sons and widow which gave rise to an inheritance tax liability.

Approximately five days before the second anniversary of his death, the professional executor and family all executed a deed of variation redirecting residue to the widow absolutely. The evidence given was that by entering into the deed of variation the family had all intended that the inheritance tax be eliminated – Mrs Vaughan-Jones as the widow would benefit from spouse exemption on the entire element of the estate passing to her.

Unfortunately, the variation did not include a statement that the parties were claiming retrospective tax treatment for inheritance tax purposes. Such a statement is a pre-condition of changing the tax status of the original bequest. The legal effect of the deed of variation was to give residue to the widow but still incur inheritance tax.

The family applied to rectify so as to insert the missing statement on the basis that it had been omitted by mistake. Evidence suggested that the solicitor who drafted the Deed had worked from an out of date precedent. The Judge accepted that there was just sufficient evidence to satisfy the high burden of proof required in a rectification claim of a mistake on the part of all the relevant parties to the Deed in question.

He therefore ruled that the Deed should indeed be rectified to include the missing declaration that the parties claimed retrospective tax treatment.

Unfortunately, in demonstrating there had been a mistake, the evidence also revealed an intention on the part of the family that the widow would transfer back to her sons the tax-free money received by virtue of the Deed.

HMRC were put on notice as is required when any such application is intended to have a tax consequence. The Judgment records that HMRC have already given notice that it considers the Deed was entered into as part of a wider arrangement and so it will still be ineffective for tax purposes (Section 142(3) of the Inheritance Tax Act 1984 denies retrospective tax treatment where a deed is entered into in 'consideration for money or money's worth, other than consideration consisting in the making').

The Judge did not have to decide whether or not the deed was part of an arrangement rendering the Deed ineffective for tax purposes. That remains a battle for the family (or at least their former solicitor's insurer) to fight.

Read the case here.

Category: Article