A beneficiary under a will, or under the law of intestacy, may give up all or part of their inheritance and redirect it to others.
This can be beneficial if the beneficiary is wealthy and they wish to pass the funds on to other family members, without the gift becoming a potentially taxable gift from their own estate.
A deed of variation cannot be executed within 3 months of date of death but must be done within 2 years. Once this time has elapsed it is too late. Beneficiaries who wish to consider the use of a deed of variation should make their wishes known to the executor prior to any distributions being made.
The deed must be in writing and be a variation under s142 Inheritance Tax Act. It is advisable to ask a solicitor to draft the deed to ensure that it meets all the requirements of the law. It should then be kept with the will.
The effect of the deed is to redirect the inheritance from the original beneficiary to the new one as though the deceased had substituted the new beneficiary in their will, or as a variation on the law of intestacy. HMRC only need be informed if the variation results in an IHT liability.
From a tax perspective the gift uses the available nil rate band, from the deceased’s estate, rather than being made as a lifetime gift from a living person. Lifetime gifts are only potentially exempt and could later give rise to a tax charge or use up some of the donor’s nil rate band, leaving their eventual estate with a larger tax bill.
The variation is effective for inheritance tax and capital gains tax but not income tax. Consideration of the income tax aspect may be important if the asset being transferred is subject to income tax. For example, the redirection of an investment bond left to a higher rate taxpayer may save inheritance tax but could incur income tax on encashment, whereas for a lower taxpayer it may be tax free.
The variation can redirect all or some of the legacy and can be to individuals or a charity. It can also redirect to a trust, of which the person redirecting their inheritance may be a beneficiary, without creating a gift with reservation for inheritance tax purposes. However, the donor may be responsible for income tax on the trust income.
Redirection to a trust can be useful where there are minor beneficiaries who may not need to access the funds for some time, or flexibility is required to determine the amount and timing of distributions to the intended beneficiaries. A discretionary trust is also helpful if a potential beneficiary is likely to be involved in a divorce, business failure or has safeguarding needs due to lack of capability.
Where the original beneficiary is likely to need social care funding, it is important to be aware that the local authority could deem the variation to be an act of deliberate asset deprivation. They may seek to set it aside or deny access to funding for care needs.
Bryan has an estate valued at £430,000 which includes his home worth £250,000. He leaves his estate to his 2 daughters Helen and Lyn who inherit £215,000 each. There is no IHT to pay on his estate as it is less than £500,000 of the nil rate band and residence nil rate band.
(IHT NIL rate band is currently £325,000 plus residence NIL rate band currently at £175,000). The levels of and basis of taxation may be subject to change.
Helen decides to give up £100,000 of her inheritance and redirect this to her 2 daughters. Helen then dies 6 years later. Her estate is valued at 500,000 so there is no IHT to pay. Had Helen kept her inheritance from Bryan her estate would have been valued at £600,000 with £40,000 IHT due.
Lyn used the deed of variation to redirect all her share of the estate to her sons and grandchildren but chose to place this in trust, including herself as a potential beneficiary. 3 years later Lyn lost a lot of money in a business, so needed to supplement her income. She was able to draw an income from the trust but the £215,000 she gave up was outside of her estate for IHT purposes.
For individual advice on wills and estate planning please contact your usual LEBC adviser, use our live chat facility, email email@example.com or call 0800 055 6585.
The Financial Conduct Authority does not regulate taxation and trust advice
Public Policy Director
Please remember, no news or research item is a recommendation or advice to buy. LEBC Group Ltd is not responsible for accuracy and may not share the author’s views. The contents of this blog are for information purposes only and do not constitute individual advice. All information is based on our current understanding of taxation legislation and regulations. The Financial Conduct Authority does not regulate estate planning, tax advice, wills or trusts.Back to News & Views