Deed of Variation
Within 2 years of the date of death a Will can be varied
An extremely useful Inheritance Tax tool
A deed of variation (DoV) changes a Will after death and enables the beneficiaries of the deceased’s estate to alter the distribution of that estate, or relinquish a bequest by changing the deceased’s Will.
This can only be done within two years after the date of death.
There are many reasons why it may be desirable to amend the Will of a deceased, or indeed an Intestacy where no Will exists, the main one is to ensure that the assets passed to a beneficiary are protected from threats such as:
Divorce – if your children/chosen beneficiaries re subject to divorce proceedings then half of what you intend them to receive will be at risk of their divorce settlement.
Long Term Care Fees – if an inheritance is passed to your chosen beneficiaries absolutely, then these assets could later be assessed for their care costs later on.
Creditors and Bankruptcy – if your beneficiaries are subject to creditors claims or bankruptcy then the inherited estate is fully at risk and will not be there to benefit them in the future.
Generational Inheritance Tax – receiving an inheritance (sometimes from both sides of the family for a married couple) will add to the beneficiary’s own estate and push them over the IHT threshold. This can be avoided.
Marriage after Death – on first death all the assets are then solely owned by the surviving spouse/partner. What if the surviving spouse/partner remarries? The inherited estate could be lost to the new spouse, disinheriting your own children.
The answer then is to use a DoV and redirect your inheritance into a Discretionary Trust; this will ensure the held assets are protected for generations to come, whilst still allowing you full access to the assets to use as you wish.
A DoV can also ensure an estate is passed on in the most tax efficient manner. Imagine that you were to receive an inheritance that pushed your estate well over the Inheritance Tax threshold, you could elect to have the assets passed to your children instead. Using the DoV means that it is not you that has forgone your legacy, it is the deceased who has made the transfer, and this prevents the gift being classed as a Potentially Exempt Transfer (PET) which would otherwise have taken 7 years to be outside of your estate for IHT.
So an adult beneficiary can only vary his/her own share of the estate, whereas if the need for a DoV is in relation to a minor, under 18, then a Court Order for consent has to be obtained.
Most of us would prefer to deal with the likes of Inheritance Tax head on, planning in advance works best so although a DoV can be extremely useful, it should not be relied upon as part of an individual’s estate planning.
Top 10 Inheritance Tax Tips
- The Annual Exemption – you can give away £3,000 each year, so a couple can give away twice this amount. If you don’t use this allowance one year, you can use it in the next year.
- Gift Assets to your Children – these are known as ‘potentially exempt transfers’ (PET’s) and provided you survive 7 years then the job is done. Who should make the gift? Will you lose control of the asset that you’ve gifted? Well, you can protect the gift in the hands of the recipient so you don’t need to lose total control of it.
- Gift part of your house to your children – after 7 years it is out of your estate for IHT. The trouble is you have to pay full market rent to your children. They in turn have to pay income tax on the rent received. If they sell it they will be liable for Capital Gains Tax (CGT) on the gain on their share, and if you get it slightly wrong the gift will fail entirely. The better solution is for one spouse to sell their half share of the house to the other spouse in exchange for an IOU, which is then gifted to the children as a 7 year PET. After 7 years, half the ‘value of the house’ is out of the estate for IHT, but the married couple still owns the entire house.
- IOU Scheme – as tip no. 3 above but it can be done with any asset, e.g. a share portfolio, second property and so on. When set up properly, the value of the asset will be taken out of the estate after 7 years.
- Deed of Variation (DoV) – say a relative dies and leaves you an inheritance that creates you an IHT liability. Use the DoV procedure to vary that Will after death and set up a Trust to receive the inheritance for the benefit of you, and your family. There are time limits but this works very well if set up correctly.
- Gift out of regular income – if you have an IHT estate and your income is higher than your expenditure, the problem will only get worse as time goes by. Gifting the excess out of regular income to your children is immediately exempt from IHT. The rules can be tricky to implement but this is a very significant exemption if used correctly.
- Business Property Relief (BPR) Scheme – if you hold investment assets in a BPR scheme for only 2 years they will be 100% exempt from IHT. You need to retain these assets until you die but you can get an income and, since you have not given these assets away, you can cash them in at any time if you need to.
- Settlor Excluded Trust – if you want to gift an asset to your children to avoid your IHT after 7 years, but the asset has gone up in value (like a house) and would trigger a CGT liability if you sell it, you could instead set up a Settlor Excluded Trust and transfer the asset to that trust. As you are the Settlor and a trustee you therefore retain control of the asset, but as you will have no benefit from it, given 7 years it will be out of your estate for IHT and you will get holdover relief for CGT as well.
- Discounted Gift Trust – can seem attractive and you can get an immediate IHT exemption for part of your initial investment. The trouble is the portion that is exempt is based on your age and health so it may not be as great as you had wished for.
- Family Protection Trusts (FPT’s) – avoid the problem in the first place. If inheriting from your parents is going to give you an IHT problem, get them to set up FPT’s because with their assets ‘in trust’ you will have the option of borrowing your inheritance from the trust in exchange for a valid IOU so that you get the full benefit of the inheritance without incurring an IHT liability.
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