• Posted

Despite the Government reviewing deeds of variation last year to see if they were being used to avoid tax, no action was taken and for the time being, they remain a useful inheritance tax (IHT) planning tool where a beneficiary wishes to redirect an inheritance.

The IHT benefit of a deed of variation is that, if made within two years of death, any entitlement from an estate that is redirected to others will be as if the deceased made the gift.  This means that the person allowing the redirection does not have to survive the gift by seven years in order for it to fall out of account of their own estate and therefore not be subject to IHT, which is currently at 40%.

For example, where a person inherits from their parent’s estate, they may have no need for the inheritance themselves. The funds would only swell their own estate giving rise to further IHT charges on their own death. Using a deed of variation, the funds could be redirected to their own children, who could really benefit from the money. The IHT on the estate of the deceased parent is not changed, but the funds have moved on to those who have more need for the funds, whilst potentially saving IHT for the next generation.

A deed of variation in certain circumstances can be used to alter the division of a Will to benefit a charity and potentially attract a lower 36% rate of IHT of the estate that is chargeable, reducing the IHT bill overall.

Another use of deeds of variation is to reorganise an estate more efficiently where the deceased left no Will, such as the deceased’s children varying the deceased’s estate to leave all the estate to the surviving spouse outright. Deeds of variation can only be made by adult beneficiaries capable of varying their entitlement.

Careful thought needs to be given to any beneficiary contemplating varying their entitlement to benefit another as once a deed of variation is signed it cannot be undone.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.