Deeds of Variation21st July 2015 12:56 pm Leave your thoughts
Deeds of Variation – One Way to Avoid Paying Too Much Inheritance Tax (and Buy Now While Stocks Last!!)
Deeds of Variation – the 10 second version
If you don’t have time read to all this, the vital message is: if you inherited or stand to inherit from someone who died in the last two years, speak to a specialist solicitor now.
Deeds of Variation – the three minute version
- The problem
- The solution
- The opportunity – a ‘no-brainer’?
- The time limits
The problem – an inheritance
When someone dies and you inherit from them, either under the terms of their Will or (if they did not leave a Will) under the statutory Intestacy Rules, this may be a problem to you.
Perhaps you want the money to go instead to someone in more need of it,
you do not agree with the way the estate is divided up, and you want to do something to put things right, or the inheritance does not fit in with planning you have carried out for your own estate.
If you inherit, the assets you inherit become your assets. If you then you give away some or all of that inheritance, you are making a gift of your own assets, and this can trigger an extra Inheritance Tax (IHT) charge later on.
If you die within seven years after making that gift, that can lead to extra IHT being paid from your estate or your spouse’s estate (so, effectively, by your heirs) and sometimes also by the people you passed the money on to.
The solution – a Deed of Variation
You may think this is unfair, and so did the law-makers, because the law gives you a way to avoid that extra IHT charge. This is the Deed of Variation.
If you inherit when someone dies, and
you give away some or all of that inheritance, and
you do it within a rigid time limit of two years after the person died, and
the deed making the gift contains the correct technical words,
then the gift takes effect for all IHT purposes as if it was not you who made the gift, but the person who died.
That means there is no extra IHT charge if you die inconveniently soon after making the gift. (This can work even if the money is not left directly to you, but to a trust from which you benefit. This is a lot more technical, but we can use a relative of the Deed of Variation, called a Deed of Appointment and, sometimes, the two of them in combination, to achieve the right result.)
The opportunity – an inheritance
Yes, another way to look at it is that any inheritance, whether wanted or not, is a rare, not-to-be-missed tax-saving opportunity.
Whether you want to keep the money or not, if you use a Deed of Variation to re-route the inheritance through the right sort of trust, that money will then be immune from 40% IHT on your death or on anyone else’s death for up to 125 years.
If the person who left the money to you had been properly advised, they could have left it to the right sort of trust in the first place, but the Deed of Variation gives you a chance effectively to go back and do for them what they should have done in the first place.
This is what many of our clients refer to as a no-brainer – something so obviously beneficial that you would need a very good reason not to do it.
The time limits
We have already seen that there is a rigid time limit of two years after the date of death for making a Deed of Variation, but there is another clock ticking as well.
In his Budget in March 2015, the Chancellor announced that “the government will review the use of deeds of variation for tax purposes”, and that review got under way in the summer of 2015.
It is widely anticipated that the result of that review will be to restrict the IHT benefits of making a Deed of Variation in future.
This post was written by Colemans Solicitors LLP