Q. I have heard of a Deed of Variation, can you please explain more?
A. This is a mechanism that is mainly used by those who want to redirect an inheritance in order to achieve inheritance tax savings.
Usually, inherited assets would accumulate within the taxable estate of the receiving beneficiary who may not want or need the inheritance.
If they make a gift of the inheritance it would either be treated as a PET Potentially Exempt Transfer) or a chargeable lifetime transfer and the value could remain within their estate for a number of years (and subsequently be subject to inheritance tax).
By using the Deed of Variation, they are able to make an immediate inheritance tax saving on their own estate.
Certain conditions must be met:
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the variation must be in writing
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it must be made by the person or persons who would have benefited from the original gift
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it must be made within 2 years of death
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the document must contain a statement that the relevant legislation (s142 IHTA 1984) is intended to apply
Crucially, the beneficiary could still retain access to the funds.
For example, let’s use John as the beneficiary.
If the monies were placed into a discretionary trust for the benefit of John’s grandchildren, John could also be included as a beneficiary of the trust. That way, he’d also be able to benefit from the monies in the trust, should they ever be required.
From the outset the whole amount would be outside of John’s estate for inheritance tax purposes.
Deed of Variation planning is very unique and if you do want to consider it, speak with your solicitor.
We hope this helps!
