COVID-19 Business Update - Click for more

How to save inheritance tax by entering into a Deed of Variation

What is a Deed of Variation?

This is a document which allows for beneficiaries named in a will to redirect the gifts in the will, thereby changing the disposition of the estate. It can also apply where there is no will and enable the rules of intestacy to be varied to enable beneficiaries to give up their statutory entitlement. 

What are the benefits of a Deed of Variation?

Tax advantages 

A Deed of Variation can enable the redirection of a gift to a beneficiary who is exempt from inheritance tax, such as a charity or spouse, thereby reducing the amount of tax payable by the estate overall. 

Reducing inheritance tax liability: A Deed of Variation can also be very useful in reducing the inheritance tax liability of an estate. This would be where the estate includes business assets which qualify for business property relief and these are not taxable when those business assets are left to a spouse. As a spouse receives spousal exemption anyway, the business property relief is wasted. Instead, a Deed of Variation could be entered into giving the business assets to a beneficiary who is not exempt from inheritance tax and you give the other assets to the spouse, reducing the overall inheritance tax. This could apply where, for instance, in the will the wife receives business on the husband’s death and the children receive the other assets. If the business assets which qualify for business property relief are redirected to the children, and the non-qualifying assets are redirected to the wife, this could end up in a situation where massive inheritance tax savings could be made. This would potentially leave the estate with no inheritance tax liability at all. 

There are of course other considerations to be taken into account when altering the dispositions in a will. However, by entering into a Deed of Variation, it is possible for considerable inheritance tax savings to be made. 

Charitable gifts: It is possible to enter into a Deed of Variation, and in that deed, make a charitable gift at a significantly reduced cost to yourself. A reduced rate of inheritance tax applies where 10% or more of a deceased’s net estate (after deducting inheritance tax exemptions, reliefs and the nil rate band) is left to charity. In such cases the current 40% rate would be reduced to 36%. Not only is a taxable estate reduced by the amount of the charitable gift, but in such circumstances, the rate of tax payable by the overall estate is also reduced. 

By way of example, if a single man without children has made no gifts in the 7 years prior to his death, and has an estate of £375,000 after deducting funeral expenses and other debts, then after deducting the nil rate band of £325,000, this leaves the deceased’s net estate for these purposes of £50,000 which is chargeable to inheritance at a rate of 40%. This means that inheritance tax is payable of £20,000. If, however, a Deed of Variation was entered into thereby giving the sum of £6,000 to a registered charity, this would reduce the taxable estate from £50,000 to £44,000. That sum would then attract tax at a rate of 36% which would mean that the tax payable by the estate would be £15,840. As the tax otherwise would have been £20,000, this means there is a tax saving of £4,160. As the gift was £6,000 and the amount saved in tax is £4,160, the net cost of the charitable gift was only £1,840. 

I have recently seen a client, who after receiving a significant inheritance in her late mother’s will, informed me that she intended to make a charitable gift out of the monies she received. I advised her that the best way in fact to do this would be by entering into a Deed of Variation as it would cost her significantly less in real terms in making the gift to the charity rather than in the normal way, for the reasons set out above. 

A Deed of Variation is often also made by a beneficiary who already has significant wealth, knowing that if they receive the gift then this will increase the size of their estate on their death resulting in additional tax being paid. They could decide that it would be far more tax efficient if they redirected the gift by way of a Deed of Variation. For instance, an elderly lady may decide in her will to leave a significant sum to her son who is already wealthy. Her son could, on her death, decide that rather than increasing the size of his estate he could enter into a Deed of Variation so that instead of him receiving the gift from his late mother, it goes to his own daughter. This can cause a significant tax saving. This is because the Deed of Variation is effective from the date of death of the deceased and is not treated as a gift by the son to his child. It does not matter if the father does not survive 7 years, it will still not be treated as a gift by him and will not be taken into consideration for inheritance tax purposes in relation to his estate. 

Non-tax reasons

There may also be reasons, other than tax, to enter into a Deed of Variation. For instance, it may be felt that someone has been missed out in the deceased’s will and the family believe that person should have benefited. This could be the case where no will was made, and the deceased was living with a partner for many years. Under the intestacy rules, she would not be entitled to a share on the estate, but the family may feel that morally she should benefit. They could enter into a Deed of Variation to provide for her. Alternatively, there could be a case where the deceased made a will, and subsequent to her will being made, a friend has provided her with a lot of help and support. The family may feel that that person should have benefited, and they may enter into a Deed of Variation to give a gift to that person.

Sometimes a Deed of Variation can be made where there is a dispute over the deceased’s money or assets. This could be settled by the parties entering into a Deed of Variation making provision different to what was in the deceased’s will. 

Furthermore, not everybody wants to receive an inheritance. A beneficiary could enter into a Deed of Disclaimer. However, a Deed of Variation is better than a Deed of Disclaimer because it enables the person giving up the benefit in the will to choose who should receive the inheritance instead. 

Are there any important rules which apply to a Deed of Variation?

There are various rules which need to be adhered to. These include the following:

  1. The Deed of Variation must be in writing and made within 2 years of the date of death
  2. All the beneficiaries affected must be over the age of 18 years and they must all give their consent to the proposed variation. 
  3. There must be no consideration in the Deed of Variation for the variation of the provision in the will. For instance, there must be no compensation being paid to a person giving up the benefit. 
  4. It is also important to note that if a person gives away money in a Deed of Variation when receiving state benefits, this could cause them to lose their means tested benefits. Furthermore, if a person uses the Deed of Variation to redirect their gift, and that person is receiving local authority care funding, this could come into conflict with the deprivation of assets rules. 

Entering into a Deed of Variation can be complex, so it is important to obtain appropriate legal advice from a specialist solicitor. 

To speak with a specialist solicitor, call Winston Solicitors on 0113 320 5000 or email howardc@winstonsolicitors.co.uk

Latest Blog

DIY Probate: the pitfalls

07/05/2020
DIY Probate: the pitfalls
It can be tempting, especially during this coronavirus pandemic, to try to save costs by dealing with the administration of an estate yourself, without instructing a solicitor. However, this could be...
Reintroduction of employment tribunal fees?

In a surprising announcement, the Ministry of Justice (MOJ) has confirmed that it may reintroduce fees for employment tribunal claims.  This would be a surprising U-turn by the government which was criticised for its tribunal fee structure which was introduced in 2013.  The fee structure was decl

Inheritance tax changes

The recent Budget saw the Chancellor announce reforms to Inheritance Tax rules which were widely expected following the Conservative Party’s General Election victory.  Currently, a married couple are able to access allowances of £325,000 each, which can be doubled up and applied as a single allow

Grandmother with Grandchild

The Prime Minister David Cameron has recently suggested that he would be “happy” to look at plans for so called “granny leave” giving working grandparents the right to take up to 18 weeks of shared paren