Following a query raised on the Trusts Discussion Forum, STEP’s UK Technical Committee has been considering the capital gains tax consequences of a deed of variation of a will in circumstances where the asset which is the subject of the variation has already been disposed of by the original beneficiary.

The specific issue raised was whether the original beneficiary should be taxed on the disposal of the asset or whether the capital gains tax deeming provisions relating to deeds of variation have the effect that the donee under the deed of variation should be treated as having disposed of the asset.

Part of the uncertainty had been caused by the apparent inconsistency of two paragraphs in HMRC’s Capital Gains Tax Manual: CG31600 and CG31630.

The committee has been in correspondence with HMRC in order to clarify this point. HMRC has confirmed that:

1. It is possible to have a valid deed of variation in relation to an asset which has already been disposed of by the original beneficiary.
2. The effect of the deeming in s.62(6) TCGA is that the donee under the deed of variation is treated as having acquired the asset from the personal representatives and must therefore also be deemed to be the person who disposed of the asset.
3. If the original beneficiary and/or the donee have already filed tax returns for the relevant tax year they will be able to amend their tax returns and/or make a claim for relief from overpaid tax.

HMRC has amended paragraph CG31600 of its CGT Manual to reflect its view.

Robin Vos TEP, Chair of STEP’s UK Technical Committee.