Post Death Estate & Tax Planning – Deeds Of Variation

For a deed of variation to be effective for Inheritance Tax (IHT) and Capital Gains Tax (CGT) purposes the following formalities need to be fulfilled:

• The document must be in writing and executed as a deed.
• The deed of variation must be executed within two years of death.
• The deed should refer to the part of the Will or intestacy being varied and be signed by all those who would or might have benefited from the original provisions.
• The deed should clearly state which inheritances are affected and how they are changing. This may be best achieved by setting out the original position and then the revision.
• The deed should not be for consideration of money or money’s worth (ie in lieu of money or an asset which represents money).
• The deed should contain a statement that ‘the variation is to have effect for either CGT only, IHT only or IHT and CGT as if the deceased had made it’. An example of the wording provided by HMRC is ‘the parties to this variation intend that the provisions of section 142 (1) Inheritance Tax Act 1984 and section 62(6) Taxation of Chargeable Gains Act 1992 shall apply’.
• The deed should contain an exemption certificate for variations of stocks, shares or marketable securities. For example, ‘I/We certify that this instrument falls within category M in the schedule to the Stamp Duty (Exempt Instruments) regulations 1987.’

What if the property being varied has been changed?

It may still be appropriate to execute a deed of variation to mitigate IHT.

Additional points to consider – Double death variations

It is possible to vary assets in an estate once; however, if a husband and wife die within two years of each other, it is possible to effect a deed of variation in respect of both Wills.

Both the husband and wife’s executors along with the beneficiaries must be party to the deed for IHT purposes.

Deeds of variation and civil partners – all rights between husband and wife equally apply to registered civil partners as defined by the UK Civil Partnership Act 2004, since 2 December 2005.

Pre-owned assets tax – pre-owned assets tax (POAT) does not apply to deeds of variation because the settlor for IHT purposes is regarded as the deceased person.

Terms explained

Will – a Will is a legal document which allows an individual to detail how their assets are distributed following their death. It also names the person(s) who will be responsible for administering the distribution of the deceased’s estate. These people are known as the executors or legal personal representatives.
 
Intestate/intestacy – if you die in the UK without leaving a valid Will, ie intestate, the so-called rules of intestacy applicable in the jurisdiction to which you or your property are subject will dictate who benefits from your estate and to what extent. The rules of intestacy vary from one country, including England and Wales, Scotland and Northern Ireland, to another.

Estate – this covers all the assets that a person owns (or, in some cases, is treated as owning) at the time of their death, less their liabilities. Their estate may also include the value of any property they have given away if either the gift they have made is subject to conditions or restrictions, or they keep back some benefit for themselves.

Legal Personal Representative (LPR) – a general term used to describe both executors and administrators.

Executors – the persons appointed in the deceased’s Will to supervise the administration and distribution of the deceased’s estate in accordance with their last Will and testament.

Administrators – the persons appointed by the High Court to supervise the administration and distribution of the deceased’s estate in accordance with the intestacy rules applicable to the deceased’s domicile.

Beneficiary/Beneficiaries – the beneficiaries are the individuals or groups of people named under the trust. These are often children, or other family members. Depending upon the nature of the trust, it may also be possible to include future generations, such as grandchildren as yet unborn.

Discretionary trust – a discretionary trust is a trust where the assets are not held for the benefit of one or more named beneficiaries. There is simply a list of persons and bodies that may potentially benefit. The trustees then have complete discretion over who benefits and when they benefit as they see fit.

Nil-rate band (NRB) – the nil-rate band is not fixed and has, historically, increased year-on-year. Currently the first £325,000 (for the tax year 2010/11) in an individual’s estate is taxed at 0% for IHT purposes. This is known as the NRB. Any assets above the NRB may be liable to IHT at 40%.

Settlor – the settlor is the person who sets up the initial investment. You can be a settlor either on your own (as a single settlor) or with someone else, such as a spouse or civil partner (as joint settlors). The settlor(s) transfers the ownership of the assets to their chosen trustees. Some trusts need to be established by means of a loan where the settlor(s) lends the money to their trustees to invest.

Trustees – the trustees are the legal owner(s) of the assets, and manage the assets for the benefit of the beneficiaries. They are also responsible for dealing with the trust fund on the settlor’s death.

Conclusion

Following the changes introduced by the Finance Act 2008, allowing the transfer of unused NRBs between spouses/civil partners on death, it is likely that the use of deeds of variation will reduce. However, tax mitigation is not the only use of a deed of variation and it should still be considered as part of long-term financial planning.

* As defined by the Civil Partnership Act 2004.