For many, receiving an inheritance will be a welcome gift but what if the recipient has no need for the money and would like to benefit others instead?
The recipient can gift on again but then a seven-year clock starts ticking and if the donor dies within that time it can have adverse consequences for inheritance tax (IHT). But is there a more tax-efficient way?
This is where a Deed of Variation can help. An adult beneficiary can redirect their inheritance to other people or charities and it will be deemed that the deceased made the redirected gift, rather than the beneficiary. There is no requirement for the person allowing the redirection to survive the gift by seven years in order for it to fall out of account of their own estate and therefore it will not be subject to IHT.
Aside from the inheritance tax (IHT) benefit that deeds of variation can provide, they also allow beneficiaries to reorganise their inheritances at potentially no real loss to the Exchequer, but of real benefit to families and younger generations.
For example, where a parent inherits under a deceased child’s estate, the parent may have no need for a windfall inheritance. The funds would swell their own estate giving rise to possible IHT charges on their own death or, if the parent was in a care home, be swallowed up in care charges.
Using a deed of variation, the parent could redirect the funds to a younger generation, who could really benefit from the money. The IHT position on the estate of the deceased child is not changed, but the funds have efficiently moved on to those who have more use for the funds.
As with all things there are some potential traps and pitfalls if the Deeds are not prepared properly. The deed must be signed within two years of the date of death and be drafted in a specific way to qualify for the benefit. A redirected gift to get a tax benefit that will ultimately end up in the original beneficiary’s hands is likely to fail as a sham gift. It is also possible to vary an entitlement into a trust, if desired, although other tax issues must be considered.
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.