Have you inherited anything in the last two years? If so, read on.
Deeds of variation (Variations) used to be a relatively unknown standard tax planning technique among the general public until, during the election campaign earlier this year, it was revealed that Ed Miliband’s family had put one in place, much to the delight of the Chancellor in his March Budget speech.
Variations are useful because they allow heirs to ‘reorganise’ their inheritances after a death occurs without the potential for adverse tax consequences that might otherwise occur. This is all above-board tax planning because the favourable tax treatment given to Variations is enshrined in our tax statute – no loopholes are being exploited in the process. So the fuss made about them during the election process came as some surprise to us tax advisers. However, the Government has recently confirmed that it is reviewing how Variations are being used for tax purposes and intends to report its finding this autumn. While there is no suggestion that the law may change, anyone who could benefit from using a Variation should think about taking advice on the merits of doing so sooner rather than later, just in case.
Variations are a useful tax planning option available to heirs whether inheriting under the intestacy rules (where the deceased leaves no Will) or under a Will. A key use of them is to allow an heir to redirect their inheritance to someone else. To achieve favourable tax treatment, the Variation must be effected within two years of death and, subject to satisfying other statutory conditions, the transfer is treated as if it had been made by the deceased directly to the new heir.
A key advantage of Variations is that, if the original heir made a qualifying Variation, as opposed to simply giving the assets to the new heir, the transfer would not be taxed twice if the giver did not survive for seven years from the date of the transfer. A common scenario we encounter is where children wish to redirect some or all of their legacy from a parent in favour of their own children who may require help with raising monies for a deposit on a property or to pay for their schooling. Making a Variation in this case can represent a tax efficient way of transferring family wealth to the next generation.
However, it’s a fallacy that Variations are only useful if you don’t want to keep your inheritance. If you do want to keep it and minimise the Inheritance Tax payable on that inheritance on your death, consider redirecting your inheritance into a trust from which you and your family can benefit. You can still enjoy your inheritance but, with careful planning, 100% of what’s left of it can still pass to your family after your death, rather than just 60% of it – i.e. you save another round of 40% Inheritance Tax. You can have your cake and eat it with Variations!
As an alternative to Variation, an heir can disclaim his entitlement provided no benefit has already been taken from it. A disclaimer, like a Variation, also means that the legacy never formed part of the original heir’s estate; but this route tends to be less used, as here the disclaiming heir has no control over to whom the property will pass next, as the benefit passes to the next person entitled under the Will or intestacy rules rather than to someone the original heir directly chooses.
It is essential that professional advice is obtained on varying or disclaiming an interest in an estate as the Income Tax, Capital Gains Tax and Inheritance Tax consequences should be considered in each case.