Having to deal with estate administration matters after the death of a loved one is hard enough. So, if during the course of sorting out probate, you discover that you are liable to pay Inheritance Tax, you may wrongly presume that there is no option but to pay HMRC the full amount which is owed.
However, by using a Deed of Variation, it can often be possible to offset a portion of this tax burden.
A Deed of Variation is a legal tool which can be used by any adult beneficiary, regardless of whether an inheritance is left in a Will or as a result of intestacy.
It is not, as many people believe, a rewrite of a Will or a ‘get out’ of the usual rules of intestacy.
A Deed of Variation allows either part or all of the deceased’s estate to be passed from one beneficiary to another.
The use of a Deed of Variation means that the moving of assets carries with it the ability to better plan tax to reduce a person’s tax liability.
The legislation permits the original beneficiary, specifically for tax purposes, to elect a new beneficiary.
He or she will, to all intent and purpose, be deemed to have inherited these assets from the deceased, rather than as a gift from the original beneficiary.
This process must take place within two years of the death to have a tax benefit and it is important to note that this does not apply to Income Tax.
One particularly useful benefit of a Deed of Variation is the ability to gift additional assets to a beneficiary who is exempt from Inheritance Tax, such as a charity, by reducing the overall charge to tax or by giving 10 per cent or more of the estate, in order to benefit from the lower rate of Inheritance Tax.
Another approach is to redirect assets so that they benefit from tax relief; for example, transferring parts of an estate between a wife – who is an exempt beneficiary – to children, who are classed as non-exempt beneficiaries.
In addition to minimising the Inheritance Tax bill, a Deed of Variation can also be used to support other family members who may have been disadvantaged by a Will or to pass on an asset in order to avoid family conflict.
Steve Horton, a Partner with Milsted Langdon Financial Services, said: “The rules surrounding Inheritance Tax and the use of Deeds of Variation can be complex and confusing so it is important to seek both specialist legal and Inheritance Tax planning advice as circumstances will always differ from person to person.
“Equally, if you are considering estate planning for yourself, it is important to obtain professional advice, which will give you peace of mind, knowing that you are leaving behind a legacy for your loved ones rather than handing over an unnecessary tax burden.”
For help with all aspects of Inheritance Tax planning, please contact us.