In Pre-Budget Report of December 2003 Chancellor Gordon Brown announced proposals to levy an Income Tax charge from 6th April 2005 in those circumstances where transferor of an asset retains and interest or continues to benefit from that asset. In instance of real property, 'benefit' envisaged is transferor continuing to reside in property he/she has allegedly given away.

How Charge Applies =======================

The Government refer to such assets as 'pre-owned assets' and, broadly speaking, its intention is to tax 'annual value' of such assets as a benefit-in-kind on former owner still enjoying use of asset. The annual value on which charge is based will be open-market rental for a property or a fixed percentage of capital value of most other assets to which new charge applies. Any amounts which transferor pays for use of asset - rent for example - will be deducted from annual value in arriving at taxable benefit. The charge will also apply if a person provides funds to purchase an asset which they go on to enjoy benefit of after 5th April 2005.

Rationale Behind Charge ============================

The charge is intended to counter many Inheritance Tax planning schemes, but unfortunately, it will also impact many innocent and unintended victims. Thankfully, legislation has included some exceptions to application of charge. The charge will not apply if;

The asset was gifted before 8th March 1986

The asset is owned by transferor's spouse

The asset is, in fact, still caught by 'Gifts with Reservation' rules and as such Inheritance Tax applies instead (hence, Income Tax charge will not be levied on top).

The asset was sold at an arm's length price for cash (even if to a connected party).

The transferor of asset had themselves inherited it and their ownership had ceased as a result of a Deed of Variation affecting that inheritance.

The transferor's continued enjoyment of asset is merely incidental or has arisen only as a result of an unforeseen change in family circumstances.

The annual taxable benefit (after deducting any contributions by transferor, where necessary) does not exceed £2,500.

Deciding to make a Will and then actually putting decision into action can be a somewhat stressful, upsetting and daunting task for some people. So it may be a little disconcerting to learn that after you have put all that effort and thought into planning your Will that there might be some opportunity for those left behind to change your instructions and alter your Will. after you are gone. It is a perfectly sound argument to point out that you have right to leave your possessions to whom you please and therefore why should disgruntled beneficiaries be allowed to change your instructions? 

The Government's focus on tax avoidance, overhaul of trusts regime as proposed in Pre-Budget Report 2004 and consequent new legislation - Finance Act 2004 (to come into effect April 2005) - led some to believe that Deeds of Variation - means by which a testator's instructions in a Will are amended - would cease to be valid. However, Chancellor Gordon Brown did not rule out their existence and therefore such Deeds have continued application and relevance. So what exactly are Deeds of Variation, how are they created and what is justification for their continued existence?

Deeds of Variation - What Are They? ====================================

A Deed of Variation is a written document which seeks to amend/vary certain instructions/dispositions in a testator's Will. The result of a variation to any Will is that one or more beneficiaries will have their entitlement affected in order to take into account someone else's new entitlement; this means that either their share is reduced in value or completely obliterated. The following example, (whilst probably very artificial), demonstrates point.

Example -------

Maude in her Will left £6,000 to her son Michael and nothing to her daughter Michelle. To rectify unfairness of Will disposition Michael agreed to a Deed of Variation by which his share was split with his sister, thus allowing each to receive £3,000. In order to be legally valid, Deed must comply with certain conditions;

1) Must be made in writing. 2) All persons who were original beneficiaries in Will and any persons who benefit from proposed variations in Deed must sign Deed. 3) It cannot be given for money or money's worth. 4) It must be made within 2 years of death of decedent.

Consent ------- The first criterion is self explanatory so we turn to issue of consent. With above example in mind it appears clear why consent of all parties is required due to significant changes in a beneficiary's entitlement which can ensue from any variation. A clear indication of consent is a signature.

Money or Money's Worth ---------------------- The must be no inducement for a beneficiary of a Will to agree to a variation which would benefit someone else. Again, an example will demonstrate point.

Example -------

Walter leaves substantial gifts to his two children Jane and Wayne but consequently has left his widow Joan impoverished and unable to sustain herself. Jane and Wayne agree to give a share of their gifts to their mother on agreement that Joan will return it to them in form of PETs (potentially exempt transfers). This will be deemed to have been given to Joan for money or money's worth and thus will not constitute a valid Deed.

Made Within 2 Years of Death ----------------------------- The Deed must be made within 2 years of decedent's death and this time frame is due to issues of tax. If made after more than 2 years Deed cannot be given retrospective affect for either Capital Gains Tax (CGT) or Inheritance Tax (IHT) purposes which, as we shall see, is one of main reasons Deeds of Variation are still used.