As is usual at the beginning of a year, we have sadly lost a few elderly clients, but this year we have also had a number of clients reporting the deaths of their parents, aunts and siblings.
In some cases our clients have been Executors of their loved ones Wills and tasked with managing the estate and distribution of assets.
Whilst this has all gone smoothly for them from an administration point of view, after the event it has come to light that they could have achieved some better financial outcomes for themselves and the remaining family and beneficiaries, if they had known about a legal action called a “Deed of Variation.”
A Deed of Variation allows the Executors to make changes to a Will with the agreement of all the beneficiaries and is usually employed to make better use of bequests within the family which will direct money more effectively to save inheritance tax.
Here is an example:
John and Rachel are in their 50s and have 2 daughters, Mary and Imogen who are teenagers. They run their own business and have total assets of £2.2m.
John’s father died 5 years ago and his mother died in January this year. John has a brother, Tom, and both will inherit £300,000 from the sale of their parents’ house under the terms of their Mother’s Will. This amount is not subject to Inheritance Tax as it is below the nil rate band.
John and Rachel have been clients for some time and we have already been able to show them that they are financially independent and that they are not reliant on John’s parents’ money.
We recommended to them that, with Tom’s agreement, they use a Deed of Variation to change their Mother’s Will, so that John’s share will go directly to Mary and Imogen equally, to help them buy houses in the future or pay for university costs.
This action will now mean that the money will never be held in John’s name and so will not count as part of his estate for Inheritance Tax purposes. His brother inherited his share as normal.
If the Will had not been changed via the Deed of Variation, the money would have fallen into John’s estate first, although he then could have gifted it to the girls.
However, this would then have counted as a gift for IHT purposes and if he were to die within 7 years this would have been taxable as part of his estate. The tax could have been up to 40% of £300,000 (£120,000).
Its vitally important that advice is sought by Executors from professionals, your financial planner, tax adviser and solicitor, when dealing with an estate.
As you can see, some simple planning by the Executors could lead to significant tax savings and better outcomes.
A Deed of Variation can be used up to 2 years after someone has died, provided all the beneficiaries agree with the Variation.
If you would like further advice about this, please do not hesitate to get in touch with us.
This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 18.04.2017. You are recommended to seek competent professional advice before taking any action.