Does the use of a deed of variation to the Labour party leader’s father’s will really amount to tax avoidance?

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Labour leader Ed Miliband has been accused of avoiding inheritance tax (IHT) by using a deed of variation to his father’s will that moved ownership of some of the family home into his and his brother’s names.

Miliband was forced to defend his own tax arrangements on Thursday, after accusing the Conservatives of accepting money from “dodgy donors” in the wake of the HSBC data leak, which revealed that the bank’s Swiss arm helped wealthy customers avoid taxes and conceal millions of dollars of assets, doling out bundles of untraceable cash and advising clients on how to circumvent domestic tax authorities.

The claim

This is not the first time that such claims have been made – in 2009 Miliband’s brother, David, who was then foreign secretary, was the subject of a story about property ownership that made the same suggestion and Ed took centre stage in a similar story in 2010.



Responding to the latest resurfacing of the claims, Ed Miliband said he had not avoided tax through the scheme. He told the BBC’s Nick Robinson:

Let me just say this: I paid tax as a result of that transaction. I’ve avoided no tax. No doubt the Conservative party wants to smear mud today. But, frankly, it’s not going to work. The story has been written before. And I’ve paid tax on that money.

The facts

The 2010 Daily Telegraph story reported Ed Miliband had paid a capital gains tax bill on his share of the property after selling it to his brother. This could be what he meant by saying he had paid tax on the money.

As things stand, that’s the only tax he has been due to pay related to the property.

Deeds of variation allow wills to be altered after someone has died, and can be made at any time within two years of their death. As well as correcting any mistakes that were made in the original will, they also allow an estate to be divided so that further down the line there is less tax to pay. They don’t reduce the tax bill at the time – IHT is paid on anything the deceased has left over a tax-free threshold.

There was no tax to pay on the family home when Ralph Miliband died, as his wife, Marion, was still alive and could have inherited the whole property without facing a bill. But had she died and left it to her sons, a tax bill was likely to have arisen.

Until 2007, every individual had an IHT allowance and anything they left over that would have been taxed at 40% (since then, couples have been able to transfer any unused allowance, and today a surviving partner could transfer up to £650,000 before facing a bill).

At the time of Miliband senior’s death in May 1994, any part of an estate worth over £150,000 left by his wife would have been taxed at 40%. By 1998, houses on the street were changing hands for £575,000, so some kind of bill was probably already looking likely four years years earlier.



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A deed of variation reportedly changed his will so that Marion Miliband’s estate was reduced. Instead of leaving 100% of the house if she died, she got 60% while the brothers each received 20%.



Had she retained a 100% share, and her home had one day been sold for £575,000, the IHT bill would have been £170,000; after the deed of variation the same event would have triggered a bill of £78,000.

Verdict

This kind of deed was often used to reduce tax bills before the new transfer rule came into effect in 2007.

However, the changes in 2007 mean that a surviving spouse now inherits the tax-free sum that their partner did not use. Without the deed of variation, the beneficiaries of Marion’s estate would benefit from any of Ralph’s unused allowance as well as her allowance; with it, they will only get anything that wasn’t used. So there is no tax advantage.

Frank Nash, tax partner at accountants Blick Rothenberg, says the effect of the deed is no different to that which would have been achieved if there had been a well-written will in the first place. “What the deed seems to have done is to pass the £150,000 tax-free allowance from the father directly to the children,” he says. “If the father had sat down a month earlier and written the will to do that there would have been no issue.”