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Varying Deeds of Variation?

by David Finnerty

23-03-2015

When watching the Government’s 2015 budget unfold from an inheritance protection viewpoint, one of the more significant statements made by the Chancellor of the Exchequer related to a proposed review of ‘deeds of variation’ when used by the beneficiaries of a deceased individuals’ estate for tax-saving purposes.

Deeds of variation have provided for years a legitimate mechanism for the beneficiary or beneficiaries of the estate of a deceased individual to redirect assets which they themselves would otherwise receive. Whilst this may just be to provide for others in greater need, often the more significant reason for their use is to reduce the amount of inheritance and capital gains tax which might otherwise be payable. Provided that such a variation is made within two years of the deceased’s death, such a variation would have retrospective effect for tax purposes.

Tax savings can be made in a number of ways, with some of these having obvious charitable benefits. At its most simple, additional assets can be diverted to beneficiaries who are exempt from inheritance tax (such as charity). A further use of deeds of variation, in situations where the ‘maths’ works in terms of the value and assets of the estate, is to write in a 10% charitable gift so as to attract the reduced rate of inheritance tax of 36%.

It is perhaps surprising, in the lead up to a General Election, that the Government would announce a review which, if actioned, might actually increase the number of estates which remain liable to inheritance tax as opposed to reduce it. The reference to this review in the published Budget document itself is just a lone sentence, but any changes which may result from it would have a profound and wide-reaching impact.

That the Chancellor’s reference to a review of deeds of variation was almost a passing statement, which could easily have been lost amongst the many other financial changes outlined, does not help us to understand easily exactly what the Government has in mind. It was expected that the budget would affect inheritance tax in some form (a leaked review Government review of inheritance tax when the deceased’s property was left to their children implied that this would be its actual focus, but few commentators expected deeds of variation to be the focus of attention.

The future of deeds of variation will be one for charities to watch unfold. Whilst not the primary source of legacy-related income, a charities’ status as an exempt entity makes their inclusion in variations appealing to beneficiaries who want as little of the estate to end up with the tax man as possible.


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