[08.07.15]

For the past two decades, the beneficiaries of a deceased’s estate have been legally entitled to alter, deny or completely redirect, any legacy bestowed by the deceased, whether under a Will or intestacy. Whilst a Will, and ultimately the known wishes of the deceased are usually regarded as sacrosanct, the requirement for this kind of flexibility after death becomes especially clear in cases where a Will is deficient, out of date, unfair or even lacking in existence, as the consequences of oversights left unchanged could result in financial calamity which would, in many cases, be the opposite result of what was intended.

Section 142, Inheritance Tax Act 1984 sets out how an adult beneficiary can draw up an instrument, or deed of variation, within a period of two years following the testators death which effectively enables them to vary arrangements, re-direct inheritance and often mitigate inheritance tax (IHT) liabilities as if it were implemented by the deceased. During the Budget 2015, Chancellor George Osborne announced that it was this ability to achieve an IHT advantage through the use of deeds which has rendered them ripe for review and in this blog we take a look at whether the legitimate merits attached to deeds of variation actually outweigh the potential for abuse.

The use of deeds of variation is not exclusive to the wealthy few who stand to lose a sizeable chunk of their inheritance, rather, it has often acted as a lifeline in cases where Wills have not been drawn up, or where Wills have been drawn up but have become outdated and no longer reflect the makeup of the family, or how the deceased has been disbursing his funds and, thereby pose a threat to the true intentions of the deceased. Even the most simple of changes or corrections can ensure that an estate is distributed in a fairer manner, whilst causing minimal offence and disruption.

For example, a beneficiary may opt to re-direct part of their inheritance to another beneficiary, perhaps a sibling who may be suffering financial pressures at that particular point in time. When you consider that a relatively simple action such as the creation of a deed of variation could help to ensure that a widow continues to live in the family home built or bought with their spouse, or that a family could be placed in an equitable position as opposed to a much worse off position, it is easy to identify the value in allowing such flexibility.

Public perception of deeds of variation, however, is often that they are used purely to shift assets in order to reduce the burden of taxation which is something that we must consider. A beneficiary may wish to vary their share of inheritance solely to save on IHT or CGT, and when you consider the burden of IHT from a hereditary perspective it is quite easy to see why some may be prompted to utilise these deeds in such a fashion as shown in the example below:

A gift of £200,000 cash after IHT would see a beneficiary receiving £120,000. If the beneficiary was to pass away with a personal estate with a value that exceeded the current nil rate band of £325,000, then the £120,000 inheritance would be subject to a further 40% IHT which would leave their heir with a comparatively meagre £72,000 from the initial gift of £200,000.

By utilising a deed of variation, the beneficiary could alter the original will and redirect his or her share of inheritance to their heirs, another person or even a charity, which would not generate an immediate tax benefit, but it would shelter the gift from further taxation down the line.

Even from this simplest of examples, we can see that deeds of variation are an effective and completely legitimate means of structuring your affairs in a way that reduces the tax attached to them.

For those who are left with the task of implementing the wishes in a Will, the inability to effect variations will mean that a family, along with their professional adviser, would have to coordinate regular cross checks of the provisions within the Will against the current circumstances and wishes so that they adequately reflect the updated arrangements within the family. Assuming that they would wish to do this which, in most families would be unthinkable to discuss a Will with a family elder to make sure that you were going to be ‘looked after’ in the document despite the fact that in cases where no instructions have been left, whether by will or intestacy, unimagined problems can arise at what must be the worst possible time when a family is likely to be grieving from the loss of a loved one.

Castletons Accountants