Case law: Document varying Will to reduce inheritance tax was ineffective without special clause
Tuesday 7th July 2015
Beneficiaries trying to save inheritance tax by varying a Will must ensure the deed of variation contains a special clause, or it will be ineffective to save tax.
A father made a Will which created an inheritance tax liability. A Will can be varied after someone has died, to reduce the amount of inheritance tax or capital gains tax payable, provided:
You do so within two years of the death.
Any beneficiaries who would receive less as a result agree to it.
The beneficiaries and executors agreed to vary the Will, just five days before the two-year time limit had expired. Instead of the sons named as beneficiaries in the Will inheriting the father's estate, it was agreed it would go to his spouse, to enable the exemption from inheritance tax for transfers between spouses to apply, and no inheritance tax would be payable.
Deeds of variation are not effective to reduce inheritance tax retrospectively unless they contain a clause specifically stating that the parties wish to claim retrospective tax treatment for the purposes of inheritance tax. By mistake, the necessary clause was omitted and this meant the variation did not reduce the inheritance tax payable after all.
The family went to the High Court to have the mistake rectified. The Court decided that there was just enough evidence to satisfy the very high burden of proof required before it will order such a document to be rectified.
The sting in the tail was that the evidence produced to show a mistake had been made also revealed that the variation had been part of a scheme whereby the spouse would subsequently transfer the estate back to the sons who were the original beneficiaries. This means it can be challenged by HM Revenue and Customs as being 'part of a wider arrangement'.
Beneficiaries wishing to vary a Will to reduce inheritance tax should ensure:
The deed of variation contains the necessary clause for it to be effective.
That it cannot be challenged by HMRC on grounds it is part of a wider arrangement.
They take specialist advice if in doubt.
Case ref: Vaughan-Jones & Anor v Vaughan-Jones & Ors  EWHC 1086
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