11th Jul 2016

Deed of Variation of a Will

I’ve just completed my third deed of variation this month and thought readers may find it helpful if I went over some of the basics around these and examples of how they can apply. I find these extremely helpful for a number of families and they are often overlooked and due to the time limited nature the opportunity can be missed.

So let’s start with the basics. Normally, if someone inherited money or other assets from an estate, and then gave it to someone else, it would be a gift from the original recipient, to the new recipient. Such a gift carries inheritance tax consequences for the original recipient, in that if they die within 7 years of the gift, their estate will be deemed to include the gifted amount when inheritance tax is calculated. So, taking an example, say Fred inherits £250,000 from his late Aunt Julie and decides to give away £200,000 to his nephew Billy. Unfortunately Fred dies within 7 years. Fred’s estate will then suffer an additional inheritance tax (IHT) bill of up to £80,000 because of that gift to Billy, even though Fred no longer has that money! You can imagine how Fred’s beneficiaries may feel towards Billy!

Had Fred made a deed of variation the situation would look very different. Fred would sign a deed confirming his intention to redirect part of his inheritance to Billy. Special statements for tax would be included, and these, together with the fact it must be made before the second anniversary of his Aunt Julie’s death, will mean the gift to Billy will be deemed, for IHT and Capital Gains Tax, to be made by Aunt Julie. This therefore avoids the worry that the original beneficiary may be taxed for being generous.

But what if the original beneficiary doesn’t know if they can afford to give so much away – or perhaps more common, what if they think the new beneficiary isn’t able to handle such a lot of money themselves, or in the case above, what if Billy was 10 years old? This is very common for clients of mine and for those I often recommend a trust is used. So, instead of redirecting the inheritance to a person, they redirect it to a trust. The key benefits being:

  • It’s still effective in reducing their IHT bill on their death
  • They and their chosen trustees can decide how it is to be used and when
  • The original beneficiary (Fred in our example) can still have the option of using the money in the trust for themselves if they need it.

Trusts obviously need careful planning so they are effective but in such circumstances they can offer substantial benefits. Similar trusts could be used if the new beneficiary is vulnerable, disabled or in receipt of means-tested benefits. The Trust can protect the inheritance and ensure it provides a long-lasting benefit to the intended beneficiaries.

Please remember deeds of variation must be completed before the second anniversary of the deceased’s death and if trusts are to be used I would suggest at least 4-6 weeks is allowed so there is plenty of time to consider the options available.

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