In this article, Kiran Vasudeva, and Wesleigh Kirby of solicitors New Quadrant Partners Ltd examine the process by which an inheritance can be redirected following someone’s death.
Executing a deed of variation is the most effective way of passing on an inheritance. Deeds of variation are available to beneficiaries of an estate who wish to redirect their entitlement under a Will or following an intestacy, be it a legacy of cash or property, or the whole estate. We often advise beneficiaries who wish to skip a generation or two and give some or all of their inheritance to family members in greater need.
The benefits of a deed of variation include the ability to save or defer tax. If the deceased held an asset that benefits from an Inheritance Tax (‘IHT’) relief, (Business Property Relief or Agricultural Property Relief, for example), it is important that the deceased does not waste the opportunity of passing this asset down the generations to maximise the tax saving.
Alternatively, the beneficiary may want to take advantage of the deceased’s available IHT tax free allowances and pass up to £425,000 to their children free of IHT as part of their own tax planning. (The nil-rate band is currently £325,000 and the residence nil-rate band is currently £125,000, although the latter may reduce to nil in certain situations).
Deeds of variation can also be used to redistribute funds to charity. Gifts to charity are free of IHT but if you leave at least 10% of your net estate to charity, the rate of IHT paid on the rest of your estate reduces from 40% to 36%.
There are other reasons why you may want to change the distribution. You may, for example, want to make the distributions equal between the beneficiaries, provide for someone who has been missed off, or tidy up any uncertainty created by the Will or intestacy.
The main benefit of executing a deed of variation is that it can have retrospective effect and is treated as if the deceased had directly given the money to the beneficiary of the deed of variation. If signed within two years of the date of death, the redirection will not be treated as a gift from the original beneficiary and will not be included within their estate for inheritance tax purposes.
The deed of variation must be signed by all the beneficiaries who are ‘losing out’ as a result of the variation, to confirm their agreement.
A deed of variation is more advantageous than a deed of disclaimer. A deed of disclaimer results in the beneficiary giving up all their rights to inheritance but does not permit the beneficiary to choose where their entitlement is to be redirected.
Deeds of variation cannot be executed by individuals who are discretionary beneficiaries under a Will.
Deeds of variation cannot be executed by individuals who are discretionary beneficiaries under a Will, as they have no absolute entitlement to the money. These wills are known as ‘discretionary trust Wills’. However, the trustees of such a Will can execute a deed which would transfer to a selected beneficiary or beneficiaries. In addition, if permitted under the Will, the trustees can add additional beneficiaries to the discretionary trust. This means that if an individual happens to be both a trustee and a beneficiary, they may vary the estate in a similar manner as would have happened under a deed of variation if the deceased had made their entitlement to the beneficiary absolute.
A deed of appointment can be executed at any time, but if executed within two years any distribution will be treated as if the deceased had made the gift directly through their Will.
If you are undertaking the administration of a loved one’s estate, it is highly advisable that you discuss with a professional adviser the potential tax savings that may be available in dealing with the distribution of the estate and the advantages of one or more of the beneficiaries passing on their inheritance.
Disclaimer: Tax rules and levels of tax can change at any time and are dependent on personal circumstances. Please speak to your professional adviser for specific advice.
Illustration by Jordan Atkinson