Posted on Apr 07, 2015 in Private Client by Murray Etherington
In his recent Budget statement George Osborne announced Government plans to review the use of Deeds of Variation for Inheritance Tax (IHT) planning. Claire Newton, an Associate in Thorntons Private Client team explains more about these interesting and useful documents.
What is a Deed of Variation?
Put simply, a Deed of Variation is a device whereby, after a death, a beneficiary can pass their entitlement in terms of the person's Will (or the Intestacy rules if there is no Will) to another person.
What is the effect of a Deed of Variation?
The effect of a Deed of Variation is such that the original beneficiary can redirect the legacy or entitlement to a third party without any tax consequences for the original beneficiary.
This allows the terms of the Deed of Variation to be written back into the Will (or alter the Intestacy rules) for Inheritance Tax & Capital Gains tax purposes as though the new gift had been made by the deceased.
Why would someone make a variation?
There are a number of reasons one might wish to make a variation, for example, to make provision for someone who was excluded from the Will, to take account of differences in the financial position of beneficiaries, or to simply pass assets on to the next generation. Of course there may also be fiscal reasons for considering a variation. Although death itself is a certainty its timing is far less so and, if a number of years (and Budgets!) have passed since a Will was put in place, it is entirely possible that the Will may be far less tax efficient at death than it was when originally done.
How is it done?
The variation must be in writing and, although HM Revenue & Customs suggest a letter would suffice, a formal deed is usually prepared. There are many strict conditions to be met for a Deed of Variation to be valid. Some examples are:
the variation must be made within 2 years of the death;
it must clearly identify the part of the estate being varied, and who is to benefit from the variation;
it must be signed by all the beneficiaries who 'lose out' by the variation;
it must include a statement, in a prescribed form, that the beneficiaries intend the variation to be effective for IHT and/or Capital Gains Tax (CGT) purposes.
It is effective from date of death and IHT is worked out taking account of the variation. For CGT purposes, the beneficiaries are treated as acquiring assets at their date of death value and not their current value.
The advantages of a variation?
The retrospective treatment, from death, of a variation is an obvious advantage and an effective form of estate planning. However, a variation also affords a beneficiary a degree of control if, say, family circumstances have materially changed since the Will was made and they wish redirect all, or part, of their entitlement in an estate to benefit another or, perhaps, a charity or a trust.
Deeds of Variation do, of course, have their place but it is important always to be mindful of changes not only in your family circumstances, but also in current tax laws, both of which may trigger the need for you to review your Will.
It seems likely that the report will confirm that Deeds of Variation are used in the most part to create tax efficiencies for beneficiaries. Therefore, it is reasonably foreseeable that their tax efficient status may result in their abolition. Now would be an advisable time to review your current Wills and to make sure that they are still as tax efficient as possible. Professional advice at this time can help to alleviate the problems which may no longer be able to be cured should the current safety net of Deeds of Variation disappear.
Murray Etherington is a Partner in our Private Client department providing specialist advice on Wills, Powers of Attorney and Executry services. If you have any questions about these services please contact Murray on 01334 477107 or email email@example.com