Deeds of Variation – an option for managing the burden of inheritance tax

News Article

If you find yourself liable to pay Inheritance Tax following the death of a loved one, you may wrongly presume that there is no option but to pay the tax man the full amount that he is owed.

However, by using a Deed of Variation, it can often be possible to offset a portion of this tax burden.

A Deed of Variation is a legal tool which can be used by any adult beneficiary, regardless of whether an inheritance is left in a Will or through intestacy.

It is not, as many people believe, a rewrite of a Will or a ‘get out’ of the usual rules of intestacy.

A Deed of Variation allows either part or all of the deceased’s estate to be passed from one beneficiary to another, usually as a gift, although it can also involve the sale or exchange of respective interests.

The use of a Deed of Variation means that the moving of assets carries with it the ability to better plan tax to reduce a person’s tax liability.

The legislation permits the original beneficiary, specifically for tax purposes, to elect a new beneficiary. He or she will, to all intent and purpose, be deemed to have inherited these assets from the deceased, rather than as a gift from the original beneficiary. This process must take place within two years of the death to have a tax benefit and it is important to note that this does not apply to Income Tax.

One particularly useful benefit of a Deed of Variation is the ability to gift additional assets to a beneficiary who is exempt from IHT, such as a charity, by reducing the overall charge to tax or by giving 10 per cent or more of the estate, in order to benefit from the lower rate of IHT.

Another approach is to redirect assets so that they benefit from tax relief; for example, transferring parts of an estate between a wife, who is an exempt beneficiary, to children, who are classed as non-exempt beneficiaries.

In addition to minimising the Inheritance Tax bill, a Deed of Variation can also be used to support other family members who may have been disadvantaged by a Will or to pass on an asset in order to avoid family conflict.

Tim Steele, a partner with Palmers, who specialises in helping clients with lifetime and inheritance tax planning, said: “The rules surrounding Inheritance Tax and the use of Deeds of Variation can be complex and confusing so it is important to seek both specialist legal and IHT planning advice to ensure that you will leave behind a legacy for your loved ones rather than handing over more than is necessary to the taxman.”

For more information on Deeds of Variation or other aspects of inheritance tax planning and estate preservation, please contact us.