Changes in the uses of deeds of variation
The Chancellor announced during the recent Budget that the government will review the uses of deeds of variation as these can currently be used to avoid Inheritance Tax (IHT) charges.
What is a deed of variation? Within two years of a person’s death, a beneficiary can do a deed of variation with regards to their inheritance to change the beneficiary. The new beneficiary may be an individual or group of individuals or perhaps a trust.
An example might be that Mr Smith inherits the whole of his mother’s estate. If Mr Smith’s circumstances were such that he did not require the inheritance, a deed of variation may be entered into to say, pass a sum of money to his children. In this instance Mr Smith decides to give £50,000 to each of his three children. The deed of variation has the effect of reading the Will as if the gift had been made directly from the Will.
In normal circumstances, if Mr Smith’s estate was above the inheritance tax threshold, he would have to survive any gifts made by seven years for them to fall outside of his estate. By entering into the deed of variation, the seven year survivorship provision does not apply and in this instance, Mr Smith has made an immediate IHT saving of £60,000.
In the past, deeds of variation have been useful tax planning tools. They have also been used to protect assets from potentially being used to fund care home fees.
As yet, the government have not announced whether they will be abolishing deeds of variation. However, that possible changes may be afoot highlights the importance of reviewing Wills on a regular basis to ensure that they are tax efficient and relevant to the individual’s current circumstances.Back to index