With a recent change of government comes plenty of speculation on what we can expect to see in Labour’s Autumn Budget. Our recent blog from our Wills, Trusts and Probate experts has reviewed some of the proposed changes to estate planning and how they may affect the future.
Another potential change to wealth and Inheritance Tax planning could be an adjustment to the law on Deeds of Variation, something which has been a topic of controversy in the House of Commons since Ed Miliband’s family prepared one in 2015.
What is a Deed of Variation?
A Deed of Variation is a document that can be prepared and executed up to two years after someone’s death. It varies the terms of the deceased’s Will and can have Inheritance Tax and Capital Gains Tax benefits.
It effectively rewrites certain terms within the deceased’s Will and can be used to correct mistakes, divert monies to other beneficiaries, and maximise available tax reliefs.
It is commonly used to gift money to adult children of the original beneficiary as an ‘advancement’ of their inheritance. This means that the original beneficiary can see the new beneficiary enjoy their gift and will at the same time, reduce their own estate subject to Inheritance Tax on their death.
A personal gift vs a Deed of Variation
As it stands, if a person were to make a gift to another person out of their own funds and survive seven years, the value of the gift would fall outside of their estate for Inheritance Tax purposes.
However, if they do not survive the seven years, the value of that gift will use up some of their Nil Rate Band (currently £325,000 per individual), which would be available to use against their estate on death.
As mentioned above, Deeds of Variation can be useful for multi-generational planning. As life expectancy increases, we are finding that those who are inheriting from their parents may not require all the funds they are due to receive but instead wish to divert some of this money to their own children.
When doing so through a Deed of Variation, the individual does not use their own Nil-Rate Band but instead will be treated for Inheritance Tax purposes as though the deceased had made the gift directly to the new beneficiary.
What if Deeds of Variation are abolished after the Budget?
Should the legislation change to no longer allow individuals to prepare Deeds of Variation to vary the terms of a deceased’s Will, gifts to family members will have to be made traditionally, with the risk of using your Nil-Rate band if you do not survive seven years.
In addition, a further proposed change for Inheritance Tax would be to introduce a lifetime gifting allowance of £30,000, which would be separate from the £325,000 allowance on a person’s death estate. This will remove the seven-year gifting rule and allow individuals to gift up to £30,000 across their lifetimes before attracting Inheritance Tax.
What Should I Do Next?
There is no guarantee that the government will amend the rules on Deeds of Variation. However, if you are due to receive an inheritance from a person who has died within the last two years and you have considered a Deed of Variation or are considering gifting some money yourself, it may be worth executing this before the autumn budget announcement on 30 October as any proposed changes could come into effect from that date.
For estate and Inheritance Tax advice on your specific circumstances, please contact our specialist Wills Team on:
01619414000
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Bik-ki Wong
Partner and Head of our Wills, Trusts, and Probate
Bik-ki has over 20 years of experience acting as a Wills, Trusts, and Probate solicitor. Bik-ki is an expert in dealing with high net-worth individuals as well as those who have more complicated circumstances or those with mental capacity issues.
About Bik-ki Wong