Lately, we’ve spoken to quite a few clients about the choice of using a Deed of Variation when dealing with their loved ones’ estate. A Deed of Variation is a document that allows any beneficiaries named in a Will to make changes to the distribution of an estate.
Importantly, it allows existing beneficiaries to add new beneficiaries to an estate and also alter the distribution of an estate between themselves.
There may be many reasons for implementing a Deed of Variation. Sometimes it could be to acknowledge a loyal friend or carer in later life who isn’t in the existing Will, maybe to equalise the estate because of previous gifts made to one child and not another, or maybe there has been a falling out in the family in the past which the beneficiaries agree to rectify, or which had already been rectified but not included in a new Will.
In these scenarios, a Deed of Variation gives the beneficiaries flexibility to make changes – up to 2 years after death.
However, a Deed of Variation can also result in another major benefit: a lower tax bill.
Inheritance Tax
A Deed of Variation can sometimes be an effective way of reducing the amount of Inheritance Tax (IHT) payable on an estate. IHT is normally payable at 40% on estates worth more than £325,000.
Using a Deed Of Variation could help in a number of ways.
- The beneficiaries could create a new beneficiary to redirect all or part of a legacy to another person (such as an adult child). This can reduce the amount of IHT payable on this portion of an estate.
- The beneficiaries could agreed to gift 10% of the estate to charity, and this would reduce the amount of IHT payable to 36%.
The first way is something we often see as it can be a tax efficient way of gifting money to children.
For example, imagine you inherit £200,000 from an estate and you want to give £100,000 of this to your two adult children. If you took the money from the estate and then gifted it to your children, you would have to live for 7 years before that money fell out of your own estate for IHT purposes (a potentially exempt transfer).
However, if you make a Deed of Variation that makes your children new beneficiaries of the original estate, then the ‘7-year rule’ no longer applies and the gifted £100,000 is no longer potentially subject to IHT.
You can make a Deed of Variation within two years of the deceased person’s death, provided all beneficiaries are over 18 and all the beneficiaries agree to the changes. We’d always recommend getting legal advice about this.
This is a useful tool to know about and at Magenta we’re always happy to discuss the situation and recommend suitable legal professionals if you require them.
Please feel free to share this content if you think this could be of interest to someone you know, or your social network, via the buttons below.