A deed of variation is in effect post death IHT planning. It is a tax efficient way for the beneficiary of an estate to redirect their inheritance to another person. To be effective the deed must be prepared within two years of the death.
To illustrate this with an example let us consider three generations of a family namely grandparents, parents and adult children. The grandparents pass away and leave their estate to the parents. The parents are approaching retirement and do not require the inheritance. They already have IHT issues of their own to consider which the inheritance will only add to. Within two years of the death they could implement a deed of variation to redirect the inheritance to their children.
Assuming that the deed is correctly implemented then for IHT purposes the inheritance would be deemed to have been left directly to the children by their grandparents. In other words it is the deceased who is treated as making the gift rather than the original beneficiary under the will or intestacy provisions if there was no will. In this way the inheritance is removed from the original beneficiary’s estate immediately with no seven year waiting period as normally applies to lifetime gifts.
Similarly for Capital Gains Tax (CGT) purposes the original beneficiary is not treated as making a disposal. The new beneficiary is deemed to have received the gift directly from the deceased.
But what if you do want to benefit from the inheritance yourself and also want to shelter it from IHT? This is where the magic happens. Going back to our example the parents prepare a deed of variation which leaves the inheritance to a discretionary trust which includes them as beneficiaries. In this way the inheritance has immediately been removed from their estates for IHT purposes but they can still benefit from it. In this scenario the gift with reservation rules which can make a gift ineffective for IHT purposes do not apply as the gift is deemed to have been made by the deceased. Discretionary trusts are potentially liable to ten year anniversary IHT charges which need to be factored in to this planning but this is generally far outweighed by the potential 40% tax saving.
There are a number of other planning opportunities with deeds of variation which should always be considered within two years of a death.