Deed of Variation

Subject to certain conditions it is possible to undertake estate and succession planning after the death of an individual.

It may be that a will leaves a gift of an asset or even the entire estate to someone who already has sufficient wealth and a better way to pass those assets down to the next generation is via a trust or an outright gift.

In that case the original beneficiary who received the gift under the terms of the will can within two years of the death of the individual redirect that gift to someone else or into a trust.

If a jointly held asset passes to a surviving joint owner, the survivor can also redirect the share they receive to someone else. Again this must be done within two years of the death of the joint owner.

What are the tax advantages?

The main advantage relates to inheritance tax. Usually when a gift is made the person making the gift must survive for seven years and take no further benefit from the subject matter of the gift.

Under the provisions of the legislation allowing a variation, the person who redirects their inheritance is not treated as having made the gift for inheritance tax purposes. Instead the deceased is treated as having made the disposal so there is no requirement to survive seven years as the subject matter of the gift is never treated as having formed part of the beneficiaries estate for inheritance tax purposes.

Case Study

Liz, a widow, dies and leaves her estate of £600,000 to her daughter, Lucy, who is a wealthy businesswoman, married with two young children.

Liz’s estate has not had to pay inheritance tax because she inherited all of her husband’s estate so she has the benefit of his unused tax threshold of £325,000 plus her own.

However Lucy’s inheritance from her parents could be at risk if her business fails, if she divorces or from inheritance tax as her estate is well in excess of the inheritance tax threshold.

The solution is for Lucy to redirect some or all of her inheritance onto trust. She could still benefit from the fund if needed but because she has given away her inheritance within two years of her mother’s death the inherited wealth has for inheritance tax purposes never formed part of her estate. Lucy could use the inheritance instead for her children’s benefit managed through the trust.

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