Any opportunity to avoid Inheritance Tax is seized upon by those angry about having to pay the so-called death tax – here's how a Deed of Variation could save you thousands.
Sections
How much Inheritance Tax will you pay?
If, when you die, your estate is worth more than £325,000 your beneficiaries face losing up to 40% of their inheritance to the tax man.
Most assets above that £325,000 allowance are taxed at 40% (unless you’re able to take advantage of the £100,000 Family Home Allowance).
However, there is a loophole that is being increasingly used by the financially savvy to cut Inheritance Tax (IHT) bills.
Deed of Variation
It involves using a little-known law relating to wills, to redirect a deceased person’s assets.
After someone has died, the beneficiaries of their estate – whether it is via a will or the laws of intestacy – can change who gets their assets using a ‘Deed of Variation’.
Anyone who receives an inheritance can use a deed of variation to give all or part of what they have received to someone else.
They just have to have the agreement of everyone who has benefitted from the will and make the variation within two years of the death of the person who’s estate is involved.
A Deed of Variation is “commonly used if the beneficiary doesn’t need the inheritance and so they decide to redirect it to their own children, grandchildren or another person,” says Patrick Connolly, a certified financial planner at Chase de Vere.
They are also often used if a will hasn’t been kept up to date, so to include additional children or grandchildren.
But, you can also use a Deed of Variation to cut the IHT due on an estate.
There are several ways you can do this.
Donating to charity
Exempt assets and beneficiaries
You could also use a Deed of Variation to alter the distribution of assets to make the most of the IHT rules that exempt certain assets and beneficiaries.
Assets passed to the spouse or civil partner of the deceased are exempt from IHT.
So, if they are receiving assets that are also exempt from IHT you could use a deed of variation to rejig things so that the exempt assets pass to someone who would otherwise be liable for IHT.
For example, if the estate includes a business you could get 50% or 100% IHT relief on it, so you could use a deed of variation to pass that on to children rather than a spouse or civil partner.
Just remember the deed of variation has to be in writing, created within two years of the death and signed by all beneficiaries of the estate.