If you plan to benefit others from your inheritance, it is worth considering a deed of variation to take advantage of inheritance tax planning.
A deed of variation allows you, as a beneficiary of a deceased person’s estate, to redirect some or all of your interest in that estate to others. The benefit is that it is as if the deceased made the gift, not the beneficiary. This can have advantages for inheritance tax (IHT) purposes.
Ordinarily, if you make a large gift you must survive it by seven years in order for it to fall out of account for IHT in you own estate. But if the gift is capable of being redirected under a deed of variation it will be as if the deceased made the redirected gift and the seven year rule will not apply. The deed of variation must be made within two years of the date of death to be effective.
A deed of variation can be made to a Will or where a person dies without making a Will (intestacy).
A deed of variation may be used to benefit the next generation of your family such as your children or grandchildren who are not beneficiaries under a Will or intestacy. It may be used to benefit someone who was left out of a Will but you feel should receive a benefit.
A deed of variation can be used to reduce the amount of inheritance tax or capital gains tax payable. If a variation means more tax is payable, a copy of the deed must be sent to HMRC within six months of the variation. However if the deed does not mean more Tax is payable there is no need to tell HMRC.
It can also be used to make gifts to charities. An advantage to this is that gifts to charities do not attract inheritance tax. Also, if 10% of a deceased person’s estate passes to charity the rest of the estate benefits from a lower rate of inheritance tax. A deed of variation can be used to vary an estate to achieve this.
We can advise you on the effect of making a variation, and help you prepare the appropriate deed and also to notify HMRC if necessary. The decision to make a deed of variation is usually taken while the deceased person’s estate is being dealt with but we can also assist if the estate has been wrapped up and a decision to vary has been made at a later time.
A child under 18 years old or a beneficiary who lacks mental capacity cannot vary their interest by using a deed of variation.