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Re-gifting inheritance to minimise tax

Deeds of variation are a useful tool with potential to save tax which is not always appreciated by non-tax experts.

While wills are documents which can be changed at any point during a testator’s lifetime, their effects can also be altered after death. Many people do not realise that when a person receives a gift under a will (or intestacy) which they consider to be superfluous to their needs, they may be able to pass the gift on to those with more immediate needs, in a tax efficient way.

Similarly where a will has been drafted in such a way that after death it is apparent the gifts are not bequeathed in accordance with the testator’s wishes, it may be possible for the legatees by agreement together to effect a rectification. In both cases by deed of variation, a gift, or part of a gift, can be redirected to another individual, trust or charity, as if it had initially been left to them by the deceased.

The benefit of this arrangement is that it could help to avoid an immediate capital gains tax charge and an inheritance tax (IHT) charge on the same asset, twice, in a seven-year period. This could happen where, for example, a beneficiary accepts a gift and then decides to re-gift it to someone else, thereby making it a potentially exempt transfer (PET), which would be chargeable to Inheritance Tax (IHT) in their estate, if they were to die within seven years. This is an important tax planning point where, for example, an elderly parent dies and leaves a gift to their daughter who, having no need for it, wants her own child (the grandchild of the deceased) to benefit. Without a deed of variation the daughter may have an immediate capital gains tax charge, and, should she not survive the seven years, would be leaving her child IHT to pay on the gift as well. 

A deed of variation is also useful where a will has been drafted by someone who has not considered the interaction of IHT exemptions and reliefs. A common scenario is where qualifying business assets or shares in a limited company, which would otherwise attract Business Property Relief (BPR) of up to 100%, are left to a spouse. Although the spouse is an exempt beneficiary for IHT purposes, the gift may no longer qualify for BPR when they leave the shares to a beneficiary in their will. However, a deed can be executed to vary the gift so that the shares are instead left to a non-exempt beneficiary, say, a child; thereby ensuring the relief is not wasted and IHT is reduced, in many cases to nil.

Another common scenario is where an estate is subject to IHT at 40%. However, by re-gifting 10% of the value of the net estate to charity through a deed of variation, the estate is charged to the lower rate of IHT of 36%, as opposed to 40%. In some cases, a small addition to the charitable giving can produce a greater increase in the amount of residue available to distribute to the beneficiaries. 

Many solicitors drafting wills do not describe themselves as tax experts and as such, do not have a duty of care to advise personal representatives on tax-saving arrangements. 

 

About the author

Mary Hase

+44 (0)20 7556 1328
hasem@buzzacott.co.uk

While wills are documents which can be changed at any point during a testator’s lifetime, their effects can also be altered after death. Many people do not realise that when a person receives a gift under a will (or intestacy) which they consider to be superfluous to their needs, they may be able to pass the gift on to those with more immediate needs, in a tax efficient way.

Similarly where a will has been drafted in such a way that after death it is apparent the gifts are not bequeathed in accordance with the testator’s wishes, it may be possible for the legatees by agreement together to effect a rectification. In both cases by deed of variation, a gift, or part of a gift, can be redirected to another individual, trust or charity, as if it had initially been left to them by the deceased.

The benefit of this arrangement is that it could help to avoid an immediate capital gains tax charge and an inheritance tax (IHT) charge on the same asset, twice, in a seven-year period. This could happen where, for example, a beneficiary accepts a gift and then decides to re-gift it to someone else, thereby making it a potentially exempt transfer (PET), which would be chargeable to Inheritance Tax (IHT) in their estate, if they were to die within seven years. This is an important tax planning point where, for example, an elderly parent dies and leaves a gift to their daughter who, having no need for it, wants her own child (the grandchild of the deceased) to benefit. Without a deed of variation the daughter may have an immediate capital gains tax charge, and, should she not survive the seven years, would be leaving her child IHT to pay on the gift as well. 

A deed of variation is also useful where a will has been drafted by someone who has not considered the interaction of IHT exemptions and reliefs. A common scenario is where qualifying business assets or shares in a limited company, which would otherwise attract Business Property Relief (BPR) of up to 100%, are left to a spouse. Although the spouse is an exempt beneficiary for IHT purposes, the gift may no longer qualify for BPR when they leave the shares to a beneficiary in their will. However, a deed can be executed to vary the gift so that the shares are instead left to a non-exempt beneficiary, say, a child; thereby ensuring the relief is not wasted and IHT is reduced, in many cases to nil.

Another common scenario is where an estate is subject to IHT at 40%. However, by re-gifting 10% of the value of the net estate to charity through a deed of variation, the estate is charged to the lower rate of IHT of 36%, as opposed to 40%. In some cases, a small addition to the charitable giving can produce a greater increase in the amount of residue available to distribute to the beneficiaries. 

Many solicitors drafting wills do not describe themselves as tax experts and as such, do not have a duty of care to advise personal representatives on tax-saving arrangements. 

 

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If you are a personal representative or a solicitor responsible for the administration of an estate and wish to ensure this is done in the most tax efficient manner for your client, please do get in touch.

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