THE MARSHALL & GALPIN GUIDE TO TAX AND SUCCESSION PLANNING USING DEEDS OF VARIATION
A Beneficiary of a will may wish to pass on their inheritance to someone else. This can save both inheritance tax and capital gains tax. This can be achieved by using a Deed of Variation.
A variation of a will or the intestacy rules must be made within two years after the death.
A. USES OF DEEDS OF VARIATION
A Deed of variation can be used where a will is not very efficient for inheritance tax purposes; changing the terms of the will can save inheritance tax.
For example, Peter dies leaving a will which leaves his entire estate to his wife Jane. When Peter made his will his assets were minimal, so he wanted to leave everything to Jane to ensure that she would have enough to live on. By the time of his death Peter’s assets are worth several million pounds. Jane can redirect some assets by means of a deed of variation to reduce the inheritance tax payable on her own death. She can even redirect assets into a discretionary trust to enable her to continue to benefit from these assets, which would not then form part of her estate on her death.
Deeds of variation can be particularly useful where a will has become out of date as a result of changing circumstances
B. TAX CONSEQUENCES
1. Inheritance Tax (IHT)
The advantage of varying an inheritance by means of a deed of variation is that, for IHT purposes, the variation will be treated as though it had been made by the deceased in his will and not as if it were a lifetime gift by the beneficiary. The beneficiary will not therefore use his own IHT exemptions or nil rate band in redirecting his inheritance.
2. Capital Gains Tax (CGT)
Where a beneficiary redirects his inheritance to someone else, he or she can elect for CGT purposes that the gift will be treated as if it had been made by the deceased. As a result, there is no liability to CGT on the original beneficiary. If the election was not made, and the underlying assets had increased in value since the death, the original beneficiary could face a personal CGT charge on the redirected gift.
3. Income Tax
There is no concession for income tax similar to the favourable concessions for IHT and CGT.
Therefore, the original beneficiary can remain liable to income tax and capital gains tax on assets transferred.
If a beneficiary varies assets into a discretionary trust from which he or she can benefit, then he or she will remain liable for all income tax and capital gains tax.
IMPORTANT NOTE
The beneficiaries must be certain that they want to pass on the assets. Once they have done so, they cannot get them back. So beneficiaries considering making a deed of variation should take care to ensure:
· that they can afford to give away their inheritance under the will or intestacy rules; and
· that they understand fully the financial and tax implications of doing so.
C. WHAT CAN BE VARIED?
The following benefits from an estate can be redirected by a deed of variation:-
1. A cash legacy
For example, “£50,000 to my daughter Janet”.
Janet can redirect the £50,000 legacy by means of a deed of variation e.g. to her own children.
2. A gift of an item or collection
For example, “to my son Peter my collection of coins”.
Peter can redirect this legacy by a deed of variation e.g. to his son
3. An absolute share of the residue
For example, “the residue of my estate to my children Janet and Peter in equal shares”
If Peter does not wish to receive his share of residue, he can pass this to someone else. For example, he could vary the will so that his half share of the residue will be held in trust for his own children until they reach a specified age, e.g. 21 years. Janet will not usually need to agree to Peter varying his entitlement.
4. A share of an estate under the intestacy rules
If someone dies without making a will, the intestacy rules govern who will inherit the estate. For example, if a man dies leaving a wife and adult children, his widow will receive:
· all his personal chattels;
· the first £125,000 of the estate; and
· a life interest in one half of the residue (i.e. the right to receive the income
which arises from one half of the remainder of the estate).
The adult children will receive the other half of the residue outright in equal shares.
The widow or any of the adult children who wish to pass on their share of the estate could do so by means of a deed of variation. For example, if the children felt that the widow was not sufficiently well provided for, they could increase what she receives from the estate.
For example, Peter dies intestate leaving assets worth £650,000. He leaves a widow, Sarah, and two adult children. Under the intestacy rules Sarah will receive personal chattels, the first £125,000 of the estate and a life interest in one half of the rest of the estate.
The children are all well off, and wish to execute a deed of variation so that the entire estate passes to Sarah. There will also be a saving of IHT here as the whole estate passes to Sarah, who was Peter’s wife, and the gift is therefore free of IHT.
Note that children under the age of 18 cannot agree to a deed of variation.
5. Joint property
Special rules apply if a property is held jointly. Married couples or partners often own assets in their joint names. When one joint owner dies the jointly owned assets usually belong to the survivor. It is often possible for the survivor to redirect the inherited share of the joint assets by means of a deed of variation. It may be possible to pass on the deceased’s share of the jointly owned home in this way.
Deeds of Variation are complex and it is important to take proper advice before completing such a deed.
For further information, please contact:-
Heather Redman (Oxford) 01865 268642 email - mailto:heather.redman@marshallgalpin.com
Lynne Reekes (Oxford) 01865 268641 email - mailto:lynne.reekes@marshallgalpin.com
Emily Dennick (Oxford) 01865 268628 email - mailto:emily.dennick@marshallgalpin.com
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