Changing the provisions of a will is done by a deed of variation. This must be in writing and signed by everyone affected by the change, including the executors if the variation results in additional tax being payable. It is important that no consideration is given, directly or indirectly, for varying the provisions of a will; if so, the arrangement will not benefit from any of the associated tax advantages.
There can be significant tax advantages if the deed of variation is entered into within two years of the deceased's death. Provisions under inheritance tax legislation and capital gains tax (‘CGT') legislation mean that, if the deed is completed within two years and contains a valid election to this effect, the variation is treated as being contained in the will itself. This means that the variation is not a gift by the original beneficiary (with all of its associated tax consequences) but is treated as a gift under the will.
As such, in the case of a father redirecting his inheritance to his children, the legislation treats the assets (which would in any event be taxed at 40% if they passed to the father) as passing directly from the grandmother's estate to her grandchildren, without any additional inheritance tax being payable. No CGT will be chargeable either. If instead, the father accepted his inheritance and later sought to gift it to his children, inheritance tax would be charged on the gift, unless he survived the gift by seven years. For CGT purposes, the father would be deemed to make a disposal, and CGT would be charged on any gain made from the date of death to the date of the gift. Alternatively, if the assets remained in the father's estate, they would be taxed at 40% on his death and so would have been subject to inheritance tax twice before passing to the children.
It is also possible for a beneficiary to redirect his/her entitlement into trust by means of a deed of variation with the deceased being treated as the settlor of the trust for inheritance tax purposes. However, for CGT and income tax purposes, the original beneficiary, not the deceased, is treated as the settlor. This means that any income and gains in the trust will be taxed at the original beneficiary's tax rate if it is for the benefit of his minor children. This may be a small price to pay for the control offered by a trust.
When entering into a deed of variation, it is important that you do not give away more than you require to maintain your standard of living. However, if you are in the fortunate position of inheriting assets that are surplus to your needs, why not give thought to a deed of variation to pass the assets down to the next generation?
Scroll down to the insight region below to view the other articles in this newsletter.