What is a Deed of Variation and how can it help reduce Inheritance Tax?
When somebody dies, their affairs must be wound up and everything they own needs to be distributed to those entitled to inherit (the beneficiaries). How their estate is distributed will depend on either the terms set out in their will or the rules of intestacy should a will not exist. There are occasions when the beneficiaries of the estate may want to rearrange their entitlement from the deceased’s estate, and this can be done with a legal document called a Deed of Variation (DOV).
In this blog, we will discuss reasons for adjusting the distribution of an estate, how a DOV works to mitigate tax, what happens when there is no will, how to ensure a DOV is valid, and who the inheritance can be given to. If you have any further questions regarding post-death tax planning, please get in touch with our specialist lawyers at Wilson & Fish today.
Within two years of someone’s death, the beneficiaries of the estate can vary their personal entitlement. There are numerous reasons why beneficiaries may choose to redirect money they stand to inherit, including:
- If the will isn’t written in the most tax-efficient way,
- If the deceased has not updated their will and inadvertently left someone out,
- If the distribution is not equal between beneficiaries,
- If no will has been written, or
- To clear up any uncertainties within the will.
In order to dilute the amount of IHT payable on the deceased’s estate, a variation can be made that redirects the money to other beneficiaries or directly to a charity. For example, if the person’s estate is worth more than £325,000 then anything above the threshold will be taxed at 40 per cent. The beneficiaries, therefore, may choose to alter their inheritance to reduce or eliminate the amount of tax that would otherwise need to be paid. Additionally, if the beneficiaries were to change the distribution of assets and gift 10 per cent of the overall estate to a charity, the rate of IHT paid on the deceased’s estate would reduce from 40 to 36 per cent.
It’s important to note that if the DOV changes the amount of IHT due on your loved one’s estate, then a copy of the letter must be sent to HM Revenue & Customs (HMRC). If you’re considering rearranging a loved one’s will for IHT purposes, get in touch with our specialist lawyers today.
If someone has died intestate and all beneficiaries agree the rules of intestacy do not generate the best outcome, then a DOV may be considered. As long as the change is completed within two years of death, this will allow for the redirection of the estate to another and is treated as being made by the deceased rather than the beneficiary.
There are no formal documents you have to apply for, instead, you must write a formal letter explaining the alterations you wish to make to the estate distribution. To ensure that the change is valid and recognised by HMRC, certain conditions must be met:
- It must be in writing
- It must be executed within two years of the death
- It must be signed by all beneficiaries who would lose out as a result of the change
- It must clearly state the parts of the estate being altered and who will benefit
Provided everyone involved agrees on the variation, you can redirect your entitled inheritance to anyone you may wish, even if they are not named in the deceased’s original will. However, should the alteration affect anyone under the age of 18 years old, then the approval of the court would be needed.
Contact our Specialist Executry (Probate) Lawyers Glasgow, Scotland
If you want to alter the distribution of a loved one’s estate, it is always recommended to get legal advice from a qualified solicitor. At Wilson & Fish, we can provide you with first-class guidance on changing a will after someone’s death and advise on the best course of action for your particular circumstance. Based in Glasgow, we help clients throughout Scotland including Ayrshire, Edinburgh, Aberdeen, Dundee, Paisley, East Kilbride and Stirling. Get in touch today by calling 0141 222 7951 or filling out our online enquiry form.