Earlier this year the media gave a little dig at the Miliband family for utilising Deeds of Variation and although the documents were not abolished in the July Budget, a consultation was opened to review the use of the document for tax purposes. This consultation is due to close on 7 October 2015.
What are Deeds of Variation?
A Deed of Variation allows a beneficiary under a Will or an intestacy (the rules which apply when a person has died without making a Will) to redirect some or all of the estate they were due to receive. One of the benefits is that for inheritance and capital gains tax purposes, it will be treated as if the deceased had made the gift themselves. This means that the original beneficiary giving up their benefit does not have to survive seven years for the value of the gift to fall outside of their own estate, if it exceeds the available capital exemptions (known as Potentially Exempt Transfers or PETs).
A Deed of Variation usually has to be in writing to have the tax benefits and must be executed within two years of the date of death of the deceased. All the parties affected by the variation must consent and therefore if there are children under 18 involved, the variation cannot take effect without court approval.
What are they used for?
- Inheritance Tax – Deeds of Variation can be used for many purposes only one of which is tax. As part of estate planning, it is possible for a Deed of Variation to be used so that inheritance will skip a generation and the wealth will be passed to future generations as the Milibands did.
- Change of circumstances – Quite often, Wills are simply made and not reviewed and as time passes, circumstances change. For example, beneficiaries have died or more beneficiaries materialise (usually in the form of grandchildren) and have been missed off the Will. Adjustments are made, using a Deed of Variation, to ensure that they also receive a share of inheritance.
- Ensuring equality – On other occasions, Deeds of Variation have been used to adjust the distribution of wealth in favour of those who are in need. More people have also started to give gifts during their lifetime to make use of their tax exemptions. In the event that equality is not achieved, a Deed of Variation would be a means of ensuring some degree of fairness (if the parties agree)!
- Utilising the reduced IHT rate – Since the introduction of the reduced Inheritance Tax Rate (IHT) of 36% (from 40%), in the event that at least 10% of an estate is bequeathed to charities (subject to a complicated calculation), Deeds of Variation have been used to redirect funds to charities. This can effectively reduce the amount of inheritance tax payable to HMRC and on occasion increase the net amount passing to beneficiaries who do not benefit from tax exemptions.
- Dealing with businesses – For those with business assets who have not done any succession planning during their lifetime, Deeds of Variation can assist by redirecting the business assets. This can ensure that the business continues to run and a sale is not forced in order for a beneficiary to extract their inheritance.
- Inserting Trusts – Other beneficiaries may have an issue managing their own inheritance and therefore it is possible to use a Deed of Variation to place assets into a Trust. This can be managed by trustees on behalf of the individual to enhance the benefit of their inheritance.
- Mitigating claims under The Inheritance (Provision for Family and Dependants) Act 1975 – As we have seen recently in the Illott v Mitson case, excluding a material beneficiary may mean a claim against the estate which takes time and can be expensive. Deeds of Variation can be a way for the parties to reach a settlement out of court and to keep costs low. This ensures the estate is kept in tact to pass on to loved ones rather than used up in legal fees.
Can I still use them or are they going to be abolished?
At present, Deeds of Variation can still be made subject to the two year time period for the tax benefits. It is likely that any changes will be announced in the 2016 Budget and therefore estate planning should not be left to the possibility of Deeds of Variation being available at the time of death. Instead, proper estate planning should be done when making a Will and Wills should also be reviewed professionally at least every 3-5 years.
For more information about Deeds of Variation or estate planning, please contact our Wills & Wealth Planning team on 01625 442148.