The Covid-19 pandemic fundamentally changed everyone’s lives quickly and unexpectedly. The nature of the challenges it presented has meant that more people than ever are reconsidering their personal circumstances.
This includes families who have recently received an inheritance from a deceased relative or friend. If you have found yourself in this position, you may have discovered that the assets were passed on under less-than-ideal circumstances.
These could include:
- The will may be out of date and not reflect material changes in family circumstances or assets. This could cause family conflict over the inheritance at an already sad and stressful time.
- There may not have been a will, and assets have been passed on through intestacy. The laws of intestacy can’t take your family’s wishes, views, and values into consideration, and as such the inheritance could create tension in your family.
- The inheritance may not be tax-efficient. Consequently, less of the inheritance may be passed down to beneficiaries to help them save for retirement or achieve other goals that the individual may have wanted to put their money towards.
If you have inherited assets from someone who has died, through a will or through intestacy, any of these circumstances might prompt you to choose to vary the terms of the inheritance.
To do so, you would need to create a deed of variation. Read on to learn more about how a deed of variation could help to protect the assets within your family.
1. A deed of variation can enable you to alter the terms of a will or intestacy
A deed of variation is a legal document that can enable you to make changes to a will after you have received an inheritance from a relative or friend. In some circumstances, it may also allow you to alter the way that intestacy rules have been applied to an inheritance.
In doing so, you could ensure that the inheritance is bequeathed to the people that the deceased individual would have preferred.
Unsurprisingly, there are some rules that need to be followed for the document to be valid:
- A beneficiary may enter into a variation without informing other beneficiaries or the executors, so long as any changes only affect their share. If further tax becomes payable as a result of the variation, the executors must be involved because they are required to report any taxable increase to HMRC.
- The variation must take place by deed and must be signed by the relevant individuals. The document is known either as a “deed of variation” or a “deed of family arrangement”.
- A variation must be executed within two years of the date of the death. This time limit cannot be extended.
- A variation can apply to some or all the inherited assets. A beneficiary does not need to give up all the assets that they are inheriting.
- A beneficiary can choose to divide the assets between one or more other new beneficiaries.
- Once an asset has been varied then it cannot be varied again tax-efficiently. More than one deed of variation can be made in an estate but only over different assets.
- Variations can also be made after the original beneficiary has received assets, whether transferred into their name or by cash into their bank account. If this is the case, though, they will need to transfer the assets to the new beneficiary.
2. You can choose to vary any type of asset provided it has passed under a will or intestacy
Any assets that you have inherited can be varied, whether personal, business, or an interest in a partnership. The asset must pass under a will or an intestacy. It must not pass under the rules of the partnership itself.
Jointly owned assets can also be affected by a deed of variation. There are many instances where this may be very valuable to you or your family to so that assets can remain in the family rather than being bequeathed to someone who is no longer related to you.
For example, if a couple originally owned a house as joint tenants but circumstances changed over time, it may no longer be appropriate for the surviving co-owner to inherit the whole house on the death of the other. An example of this could be if the couple was in the process of separating but had not yet finalised their divorce when the person died.
It is important to understand the nature of the ownership of any jointly owned asset.
Most couples own their own home as joint tenants. This means that they both own 100% of the house, so their part ownership does not pass under their will. Instead, it passes automatically to the co-owner.
It’s also possible to own an asset jointly is as tenants in common. This means that each person owns a 50% share which they can hand down, through their will, to anyone they choose, which may not necessarily be the other co-owner. This is typically found in ownership of houses between siblings, sometimes between unmarried partners or sometimes between different generations of the same family.
A joint tenancy can be severed and made into a tenancy in common by a deed of variation, allowing you to elect for a family member to receive the share in the asset rather than the surviving co-owner.
3. A trust can be a helpful way to implement a deed of variation
When you create a deed of variation, you can choose to transfer your inheritance into a trust, most commonly a discretionary trust. In this way, you could support other family members, and also continue to benefit from the assets by having access to income or capital in a tax-efficient way.
This is because trustees can have control over trust assets for their own benefit, or for the benefit of others (the beneficiaries of the trust).
As such, it’s an option that could be particularly beneficial where elderly, unwell, or otherwise vulnerable relatives need to have some financial support.
The value of the trust is not usually added to the taxable estate of any of the individual beneficiaries. So, by using assets in the trust, you could support them financially as and when they need it during their lifetimes without adding to their estate’s Inheritance Tax (IHT) liability if they have a limited life expectancy.
A discretionary trust also creates long-term tax planning opportunities for future generations. It can protect assets from divorce, business failure, or other debt issues if created and used properly. As a result, this could help give you confidence that future generations will continue to benefit from your family’s wealth regardless of any external circumstances that could occur in the meantime.
However, this does not guarantee protection in all circumstances so it’s important to seek financial advice before you proceed.
4. A deed of variation can help to improve the tax efficiency of the estate
A further benefit of a deed of variation is the opportunity to improve the tax efficiency of the inheritance, keeping more of the inheritance in the family.
When someone dies, the value of their assets is calculated at the date of death for tax purposes. By the time the estate is administered, those assets may have changed in value.
Depending on how the assets’ value has changed, you can elect that the deed of variation should be treated for IHT and Capital Gains Tax purposes as if all the provisions in the deed of variation had been in the will or the intestacy itself.
The election does not have to cover both taxes, you can choose to include just one or the other depending on your circumstances. Making use of this clever tax legislation could be a helpful way to ensure that more of the inheritance can be passed on to family members.
A deed of variation can enable you to take advantage of the residence nil-rate band
The residence nil-rate band is an IHT benefit that can be claimed under certain circumstances, in addition to the ordinary nil-rate band of £325,000. Because the residence nil-rate band has only been available since 2017, older wills are unlikely to have been drafted to take advantage of it.
The good news is that you can use a deed of variation to claim this relief.
For deaths after 6 April 2020, the amount of the relief should be £175,000. As long as all rules are followed, it’s also possible for a transferable residence nil-rate band to be claimed if the person who has died was predeceased by their spouse.
Consequently, on the death of the second of a married couple, up to £1 million worth of assets might be excluded from the IHT calculation because they are eligible for tax relief.
5. You could choose to vary the gifts left to charity in the will to benefit from a reduced rate of Inheritance Tax
For assets in excess of the nil-rate band passing to individuals who are neither spouses nor charities, the typical rate of IHT is 40%.
However, if 10% of the estate is gifted to a qualifying charity, this rate can be reduced to 36%. So, if the original will made provisions for charity but not enough to qualify for the lower rate, a deed of variation can rectify this in order for the estate to take advantage of the lower rate of IHT.
This can be a mutually beneficial situation, as the charities you support can receive more vital funds for their work, and your family can also keep more of your inheritance to support you financially.
Some business or farming assets are also eligible for IHT relief.
If someone has inherited assets from the estate of another individual but then subsequently dies themselves within the two-year period required to create a deed of variation, it may be possible to vary the terms of the will of the first person to have died.
The executors of the second individual to die may vary the inheritance that they received from the individual who died first and direct it, potentially, to the same people who would inherit under the second estate. The assets could be redirected into a trust and would be treated as if they came from the first estate for tax purposes – potentially creating significant tax savings.
There is another IHT relief, known as “quick succession relief”, which can also apply in these circumstances. As such, advice should be taken as to which tax relief will offer the greatest benefit to your family.
These rules provide a helpful opportunity to protect your family’s assets
These rules provide helpful opportunities for you to protect family assets. They can also help to protect your relatives, particularly if they are vulnerable.
For business owners, it means that business assets can be passed to family members who are running the business rather than being divided in a way that could harm the business and potentially compromise the future financial security of your family.
In these uncertain times, though it can be difficult to think about while grieving a loved one, a deed of variation can be an invaluable resource if you or your family receive an inheritance.
Get in touch
If you’d like support with a recent inheritance, we can help. Email contactme@kbafinancial.com or call us on 01942 889 883.
Please note
This article is for information only. Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
HM Revenue and Customs’ practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.
The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.
Will writing is not part of the Openwork offering and is offered in our own right. Openwork Limited accept no responsibility for this aspect of our business. Will writing is not regulated by the Financial Conduct Authority.
Approved by The Openwork Partnership on 10/11/23.
