The Government has announced a £12 billion a year tax hike in a move to reduce NHS waiting times and to improve the provision of social care. Many consider an increase in inheritance tax to form part of this tax hike because it will shift the focus from taxes on income to taxes on wealth and it will account for the ever-growing retired/semi-retired population which is predicted to lead to an increase in the amount of wealth transferred over the coming decades.
Even at current rates, inheritance tax can be significant. Following their death, each individual is taxed at a rate of 40% on assets above a tax-free allowance of £325,000. Without the correct financial planning, an individual’s estate can be hit with a large tax bill which can significantly reduce the value of the estate distributed to their beneficiaries.
Where an estate has an inheritance tax liability, executors and beneficiaries can benefit from the use of a deed of variation in order to administer the estate in a more tax-efficient manner.
A deed of variation is a document that can redirect the beneficiaries’ entitlements under a Will or, if no will is in place, the intestacy rules to other parties who, due to their circumstances, may be able to inherit the deceased’s wealth in a more tax-efficient manner. The new beneficiaries do not need to be named in the Will nor benefit from the estate under the intestacy rules. A variation can also be completed before or after a grant of representation is obtained.
Deeds of variation can mitigate inheritance tax on an estate through gifting assets to a beneficiary who is exempt from inheritance tax or redirecting a percentage of the estate to charity so that a lower rate of inheritance tax applies.
It is important to be aware that there are a number of conditions to satisfy to ensure that the variation is valid and enforceable. The variation:
- must be drawn up within 2 years of the individual’s death;
- must be signed by all executors and beneficiaries of the deceased’s estate;
- must explain the changes proposed and meet the requirements of the Inheritance Tax Act and the Taxation of Chargeable Gains Act.; and
- must be accompanied by court approval where any changes affect those under the age of 18.
If you would like advice on the suitability of a deed of variation in your circumstances, please get in touch with a member of our Wealth Preservation team.