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The actor Rik Mayall unexpectedly died in June 2014 leaving his family exposed to a large Inheritance Tax bill (IHT) because he had not made a Will.  However, his family can still try to lessen the impact of the IHT by drawing up and executing a Deed of Variation.

Variations can also be made to Wills.  Ed Miliband was recently accused of benefiting from a deed of variation to his father’s will made by his mother.   In 1994 Mr Miliband, his brother David and their mother agreed to make a posthumous amendment to the Will of their father.

Under the change, each of the Milliband brothers received a 20% share of the family home thereby reducing Mrs Milliband’s share to 60% and reducing the inheritance tax liability on her estate.

Although, Ed Miliband denied any tax benefit from the arrangement, Chancellor George Osbourne, announced a review on the avoidance of inheritance tax through the use of deeds of variation as part of the government’s wider tax avoidance strategies in the 2015 budget statement.  The findings are expected to be published this Autumn for inclusion in a future Finance Bill.

What is it?

Also known as a Deed of Family Arrangement this type of Deed allows beneficiaries to rearrange or vary their entitlement.  The beneficiaries of a deceased’s estate are able to alter the distribution of or relinquish a bequest from an estate.

Conditions that Must be Met

The law states that subject to strict conditions a variation takes place as if it had been made by the deceased and is “read back” into their Will/estate for IHT purposes.  It is therefore classed as a gift which is legitimately allowed to take place, but for IHT and Capital Gains Tax (CGT), the consequences are as if the gift had been made by the deceased.

In order to establish a Deed of Variation all the beneficiaries must be in agreement, if minors are involved an application must be made to the court for consent to be obtained as they cannot themselves consent to the changes.  It is also possible for a beneficiary to redirect their entitlement into trust with the deceased being treated as the settlor of the trust for IHT purposes.  However, for CGT and Income Tax purposes the original beneficiary not the deceased is treated as the settlor.

What are they Used For?

Deeds of Variations are not just used for tax reasons, in fact the origins of these types of deed are much older than the IHT rules and fit well with our freedom to leave our estate by Will to whoever we choose.  

Examples are numerous, for example when a grandparent leaves a legacy in a will to named grandchildren and then does not update his or her Will when further grandchildren are born.  The deed would allow the new grandchildren to be added to the Will.

They can also be used, with care, to resolve a family dispute or unhappiness.  For example a claim may be brought against an estate by a person expected to inherit under a will but who has not.  This sort of claim could be settled by the other beneficiaries using a deed of variation to make provision for them.

Clearly they have legitimate uses rather than just as a tax avoidance technique, so lets hope they survive the Autumn!

On 6th April 2015 the Practice Direction on Pre Action Conduct (PDPAC) changed.  It sets out the conduct and procedures that the court expects parties to follow before commencing proceedings where no other specific practice direction applies (i.e. for contested probate matters).  McMillian Williams’ Head of Contested Probate, Hayley Bundey, explains what the key changes are and how they impact contested probate clients.

Alternative Dispute Resolution (ADR)

The most important change is emphasis upon Alternative Dispute Resolution (ADR) (including mediation) with removal of the phrase "although ADR is not compulsory" and inclusion of potential costs sanctions if parties fail to respond to/ refuse to enter into ADR. This is a significant shift from a "gentle pushing" of the parties towards ADR to a "direct insistence" that they attempt to do so. This change stems from a 2013 case which started the process but crucially this is now enshrined in the Court’s rules which parties are required to comply with. The emphasis on ADR is then reflected in other changes in the PDPAC below.

Proportionality

The new PDPAC introduces the principle that any disproportionate costs incurred will be unrecoverable as part of the costs of proceedings; thus directly targeting the behaviours which result in wasteful and unnecessary Pre-Action costs.  This strengthens the importance of ADR and its ability to avoid the often unnecessary costs of litigation.  

Stocktaking

The introduction of stocktaking (reviewing the evidence to attempt to narrow the issues in dispute) as a new active process which parties must undertake before commencing proceedings is another example of positive change in the new PDPAC. This, coupled with the emphasis on ADR, should ensure that court proceedings is now truly a last resort after attempts at ADR, and by that point the issues in dispute should have been reduced as far as possible before the Court hears the case (thus saving unnecessary costs).

We Can Help

The McMillan Williams' Inheritance Disputes team have always been strong advocates of ADR (particularly mediation) so these changes to the PDPAC are therefore very welcome as they should gradually shift the Court’s psyche towards a culture of compulsory mediation. More importantly the changes enable more and more clients to obtain their just inheritance without "airing their dirty laundry" in Court. Mediation, in particular, gives our clients the chance to also agree terms which they wouldn’t necessarily be able to seek at trial; such as re-distribution of personal possessions of sentimental value which can often make the difference between the parties resolving a dispute or not. 

At McMillan Williams we have extensive experience at successfully resolving inheritance disputes through mediation.  If you think you have an inheritance dispute and want some advice on your options call us today on 0203 551 8500 or email. us at enquiries@mwsolicitors.co.uk

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