Deeds of Variation escape unscathed
In the 2015 Autumn Statement it was announced that following a consultation on the use of Deeds of Variation, no changes are to be made.
Deeds of Variation allow an adult beneficiary to redirect an inheritance, so that it passes to someone else or to a trust, and for the gift to be assessed for Inheritance Tax (IHT) as if the deceased had written this into the Will himself (even if no Will was made). The lack of any new restrictions is a huge relief to private client practitioners, as Deeds of Variation fulfil a very useful function, allowing retrospective changes to be made following a person's death, which is often when problems first surface.
The rationale behind the government's investigation was the concern that Deeds of Variation are widely used for tax avoidance. However, if the effects reduce the amount of IHT payable, HMRC must be informed, so it was never the case that this was happening under the radar. Also, it is important to note that Deeds of Variation can only ever achieve after death what the deceased could have put in the Will.
Ideally, every capable person would have a Will, which would be updated every 5 to 10 years. In reality, many people do not have Wills in place, and many of those that do executed them many years before their deaths. Given an ever aging population, it is not uncommon for someone in their 80s to leave assets to children in their 60s. These children would often much rather the legacy be paid direct to their own children or grandchildren, rather than receive the legacy and then immediately gift it on to their children as this will risk additional IHT becoming payable if they do not survive the gift by 7 years.
Another common use of Deeds of Variation is to leave a little bit extra to charities, in order to fall outside the IHT charge completely, or to take advantage of the reduced rate of IHT (if 10% of the estate is left to charity). They are also used where there is no Will in place to pass an estate to a spouse (as is often the deceased's intention) and the deceased failed to appreciate the way in which the intestacy rules apply.
Had the use of Deeds of Variation been restricted, this would have the effect of discriminating against those people without Wills or had not taken legal advice recently.
Once the person has already died, the alternative to Deeds of Variation is a claim to the Courts, which can be expensive, time consuming and upsetting for those concerned. Without Deeds of Variation there would be further burden on the already stretched Courts, which would surely be unwelcome.
Thankfully, and following widespread vocal support for the status quo, the government has seen sense, and Deeds of Variation remain available for use, at least until they are next in the political spotlight.
If you would like to discuss any aspect of this article further, please contact Paul Colman or any member of the Wrigleys' Private Client team on 0113 244 6100.
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The information in this article is necessarily of a general nature. Specific advice should be sought for specific situations. If you have any queries or need any legal advice please feel free to contact Wrigleys Solicitors
25 November 2015