Deeds of Variation

Usually an inheritance is a good event, but there are occasions where the inheritance serves mainly to increase a recipient’s tax bill; but the problem can be avoided.

However, Inheritance Tax (IHT) may shed a different light on it, since these assets will be taxed again on the recipient’s death.

For many recipients of an inheritance who want, in turn, to hand on their wealth when they die, and IHT can mean that there is less available for heirs and loved ones.

It may well have been that the original Will could have been written to set up a trust for the benefit of the recipient and their family, which would ensure that the inheritance did not form part of the estate for IHT purposes. But even if a trust was not used, there is a solution, and this is known as a Deed of Variation.

If the death occurred within the last two years, any inheritance beneficiary should be able to execute a Deed of Variation. This allows the recipient, in effect, to re-write the Will and put the inheritance into a trust. As long as the deed was completed within two years of death, it will be treated for IHT purposes, as if the Will had been written this way from the outset.

The advantage of a Deed of Variation is, it allows individuals to benefit from the trust without the assets being treated as part of their estate – and therefore liable to 40% tax.

When IHT is levied, under that law the rate of IHT could be reduced to 6% of the trust’s value every ten years – and it is often lower.

That is the remedy, but what circumstance can give rise to the problem. One of the most common to occur is when someone inherited an estate but has limited life expectancy. Without a Deed of Variation, this raises prospect of two IHT charges on the same asset within a relatively short space of time.

Another typical example is when a beneficiary can afford to pass on some or all of an inheritance to their children. Normally, if an asset is gifted to children, the donor needs to survive seven years for the gift to escape IHT. With a Deed of Variation, the assets move outside the IHT net immediately.

Deeds of Variations have become a very useful tool in minimising any IHT liability, but also the flexibility to pass on gifts to other beneficiaries in the circumstances outlined above.

A word of warning however, the government has their eyes on Deed of Variations, and there has been suggestions that these will be modified in the future as to not allow the considerable protection they now afford to families.