Does a Deed of Variation affect Inheritance Tax?
05 November 2018
By Probate Case Manager, Sian Davies
A Deed of Variation can be used to make changes to the way in which the Estate of a deceased person is distributed to Beneficiaries. In some cases, it also can help reduce the amount of Inheritance Tax payable on the Estate.
A Deed of Variation can be applied to an Estate regardless of whether or not the deceased left a Will. It's important to note, however that the Personal Representatives and all the Beneficiaries involved must be in agreement to the Deed of Variation before it can be applied.
Reasons for a Deed of Variation
There are a number of reasons why a Deed of Variation may be required. These include:
- Change to the value being distributed
- Change to the recipient of the distribution
- Providing for someone who was left out of the Will or would otherwise not have inherited under the Rules of Intestacy (if there was no Will)
- Reduce the amount of Inheritance Tax or Capital Gains Tax payable
- Clear up any uncertainty over the Will
The Deed of Variation must be signed by all of the Beneficiaries who are affected by the variation and can be made before or after the Grant of Representation is issued. It must however be completed within two years of the date of death.
How can a Deed of Variation affect Inheritance Tax?
As long as the Deed of Variation is completed within two years of the date of death, for Inheritance Tax purposes, it is treated as if the Will of the deceased had been re-written immediately before the deceased passed away. If the Deceased died without leaving a Will, it would be read as if the entitlement under the Rules of Intestacy had been changed.
Inheritance Tax is usually payable if a person's Estate exceeds the Inheritance Tax threshold (also known as the nil rate band) which is currently £325,000. In most cases, anything above the £325,000 nil rate will be liable for Inheritance Tax, although there are other reliefs and exemptions that may also apply before Inheritance Tax is payable. The standard rate for Inheritance Tax is currently 40%. For more information on whether Inheritance Tax needs to be paid on an Estate and how this is calculated, see Probate and Inheritance Tax.
With our Probate Complete Service we take full responsibility for getting Grant of Probate and dealing with the Legal, Tax (excluding VAT), Property and Estate Administration affairs.
There are a number of ways that a Deed of Variation can affect Inheritance Tax and this will be looked at below.
1. The Inheritance Tax Position of the Beneficiary
A Deed of Variation can help to reduce the amount of Inheritance Tax payable on the deceased's Estate and it can also minimise any Inheritance Tax liability that may arise on the death of a Beneficiary.
For example, Paul is a Beneficiary of his mother Mary's Estate. Paul decides that he does not need the inheritance and makes a decision to draft a Deed of Variation to redirect his entitlement to his child, instead of inheriting it himself and then passing it on to his child when he dies. Although the amount of Inheritance Tax payable on Mary's Estate may not change, through varying the entitlement, Paul has potentially reduced or eliminated the Inheritance Tax due on his own Estate when he passes away.
There are further benefits to using a Deed of Variation in this way, as the changes made to the Will under the Deed of Variation would be treated as though they had been made by Mary herself and not by Paul. This means that if Paul was to pass away within seven years of the redirection of the gift, this would not affect the Inheritance Tax position of his Estate.
2. Exempt beneficiaries
A further way that a Deed of Variation can affect Inheritance Tax is by using it to alter the distribution of an Estate to utilise the Inheritance Tax rules regarding exempt Beneficiaries. Any assets that pass to a spouse or civil partner of the Deceased, for example, are exempt from Inheritance Tax as these individuals are classed as exempt Beneficiaries.
Therefore a Deed of Variation could be drafted to split the assets between the exempt and non-exempt beneficiaries to mitigate the Inheritance Tax payable.
A gift left to a charity is also exempt from Inheritance Tax. If the gift represents at least 10% of the Deceased's net Estate, the rate at which the Inheritance Tax is charged is reduced from 40% to 36% on the rest of the Estate (if this is liable for Inheritance Tax.)
Therefore, a Deed of Variation could be used to gift a proportion of the Deceased's Estate to a charity, reducing the overall amount of Inheritance Tax payable from the Estate.
It is important to note that if a Deed of Variation changes the amount of Inheritance Tax due, a copy of the Deed must be sent to HM Revenue & Customs, within 6 months of the date of the Deed.
The rules surrounding Inheritance Tax are very complicated and if you are considering using a Deed of Variation to mitigate Inheritance Tax, it is very important to obtain independent legal and financial advice.