The will to change: deeds of variation

Family Law|March 26th 2015

Now the dust has settled on the recent budget, it’s worth taking a look at one issue that was subject to a lot of rumour. The actual measures announced turned out to be quite different to the speculation.

When someone dies, inheritance tax (IHT) is charged on certain assets, at 40 per cent over what’s known as the ‘nil-rate’ band. The latter has been parked at £325,000 since 2009. This has meant that up to £325,000 of a person’s estate could be free of IHT.

Before the budget speculation suggested that that the nil rate band would be increased beyond consumer price index increases, or that a new, additional nil rate band on the net value of the family home would be introduced. Neither happened. Instead, the Chancellor said the government would conduct a review of inheritance tax avoidance through the use of ‘deeds of variation’. These allow the terms of a will to be rewritten after someone has died for tax purposes, and they are often used by the beneficiaries of a will.

If someone dies intestate, that is without a valid will, or someone does not take inheritance tax advice when their will is drafted, a higher than necessary tax bill could be the result. In these circumstances it is sometimes possible to use a deed of variation. So long as certain conditions are met (as set out in section 142 of the Inheritance Tax Act 1984), the measures set out in the deeds will be treated for tax purposes as if they featured in the deceased’s will, or were included in the intestacy provisions.

A deed of variation could be used to address obvious oversights in a will, such as a grandparent naming two grandchildren as beneficiaries but forgetting to amend their will when a third grandchild is born. Deeds also allow a beneficiary to redirect their inheritance to another person, or to a charity or managed trust so that young or vulnerable beneficiaries do not inherit before they are ready.

Deeds of variation are often used to try and ensure valuable tax relief is not lost as a result of a compromise in litigation. For example, if a surviving spouse successfully claims that reasonable provision has not been made for them under the Inheritance ( Provisions for Family and Dependants) Act 1975, then a deed of variation can be used to reclaim inheritance tax that otherwise would not have been payable. A key factor is timing as a deed of variation must be completed within two years of the deceased’s death for it to be effective for inheritance tax planning.

It is worth remembering that there are lots of other ways people can mitigate their exposure to IHT. These include such measures as using up the annual exemptions for gifts, structuring a will to make the best use of tax relief on certain assets (such as agricultural or business property), and ensuring that other exemptions and reliefs are fully utilised and not lost.

With the end of the tax year now fast approaching, making the best use of the exemptions available should be considered as a matter of course, in much the same way that people are advised to look at maximising annual ISA allowances. Exemptions should be discussed with an expert to make sure you don’t miss out.

Whether you are making a will for the first time, or checking to see if your current will is up-to-date from a tax planning perspective, it’s worth getting professional advice. Don’t leave it to your loved ones to try to sort out your tax position once you have gone – especially as in future years the deed of variation may no longer be an option.

Author: Jane Gray

Jane is a solicitor in Stowe Family Law’s Hale office in Cheshire. She has 15 years of experience in wills, tax trusts and probate law and is a fully qualified member of the Society of Trusts and Estate practitioners (STEP).

Comment(1)

  1. Stephen says:

    Hello

    My Father passed away in January leaving his estate in a discretionary trust comprising 1.2 million in cash, the family home value 300k and 2 letting properties value 100k each. All of his assets were jointly held between himself and my mother with the unique exception of his premium bonds value 30k.

    As I understand it my Mother automatically inherits all of the estate as the main beneficiary and has 325k nil rate band and also that of my Father making 650k free of tax.

    Upon her demise, myself and my three siblings inherit the estate, less 40% IHT and upon our demise their grand children according the stipulations in my Father´s will.

    My Mother could gift us money now which would be classed as a PET. She is in her eighties and not assured of living another 7 years.

    My question is this: using a Deed of Family Variation is it possible to eliminate the threat of IHT completely?

    Many Thanks

    Stephen

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