Deed of Variation
A question we are often asked is, “Why do I need to complete a deed of variation, can I not just re-direct my inheritance without the deed of variation”? Yes of course, the original beneficiary could simply hand on his/her share to another without making a deed of variation, but this would be regarded as a lifetime gift by the original beneficiary and would be subject to the seven-year survivorship rule. If that individual failed to survive 7 years, this would lead to the gift being assessed for inheritance tax as part of the estate of the original beneficiary and tax may be payable as a result of not completing a Deed of Variation.
An example of why a deed of variation might be effective: –
Mr Jones is an only child and his mother recently died leaving her estate to him. His mother’s estate was worth £300,000. Mr Jones is a divorcee and already has a personal estate of £550,000 so he is already over his personal inheritance tax allowance.
If Mr Jones receives a further £300,000 (from his mother’s estate) his own personal estate would increase to £850,000. Therefore, upon receipt, he would have an additional £120,000 (40% of £300,000) of inheritance tax to pay on his death (on top of his current inheritance tax liability).
Mr Jones has two daughters who are struggling and need assistance now, therefore if Mr Jones completes a deed of variation, he could allow his daughters to share his late mother’s estate which in turn removes the additional inheritance tax liability from his own personal estate, saving £120,000 in tax. Furthermore, if the deed of variation redirects his late mother’s estate into a discretionary trust, his daughters could benefit from the money now and it also protects the money in case either daughter becomes divorced or bankrupt.