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How to beat inheritance tax by rewriting your will

by | Oct 7, 2021

Britons paid £5.4bn in death duties last year and the state haul from the divisive 40% duty is forecast to hit a record £6bn this year, before rising further still to £6.6bn in 2026.

Booming house prices, frozen tax breaks and coronavirus deaths have caused a spike in the number of people who pay. In five years the number of families hit by the tax is expected to increase by around three fifths.

However, there is a way to beat the taxman from beyond.

What is a ‘deed of variation’?

A deed of variation – or DOV – is a legal document that allows the beneficiaries of an estate – children, for example – to make changes to a will, in the name of the deceased, after their death.

This means that, if someone has not written their will in the most tax-efficient way, if they have inadvertently left someone out of their will, or if they have not written a will at all, the beneficiaries are able to redirect the money they stand to inherit to other parties.

In the case that you are about to inherit a windfall that will take your own estate over £325,000 – the personal allowance above which 40pc IHT applies on your death – you can alter the deceased’s will so that money you stand to inherit passes directly to other beneficiaries, reducing or eliminating the amount of tax you would otherwise have to pay later.

For example, you may want to redirect some of the money you stand to inherit to charity, or to your grandchildren via discretionary trust for their benefit later on.

If 10% of an overall estate is gifted to charity, the rate of IHT paid is reduced by 4 percentage points to 36% and all donations are tax free.

You can gift up to £325,000 into a trust before any tax is due, as long as you survive the gift for seven years. This solution is sometimes used by grandparents who wish to contribute to private school fees.

What are the rules?

The most important thing to remember is that there is a two-year window. Any deed of variation must be drawn up within 24 months of the death of the deceased, and must be signed by all the executors and beneficiaries of the estate to be valid.

A DOV is separate from a grant of probate – the legal document that allows you to gather up and distribute the assets of the deceased – and can be obtained before or after probate is granted.

There are no formal documents to apply for, you can simply write a letter explaining the changes you wish to make. However, you must ensure the letter meets certain conditions – HM Revenues & Customs provides a checklist.

Provided everyone else involved agrees, you can redirect your inheritance to anyone you wish, even if they are not named in the deceased’s will.

Although you may be the one deciding what changes to make, through a DOV the changes are made in the name of the deceased as if they were making the changes themselves.

If a variation affects anyone under the age of 18, you will need court approval before making any changes.

What if there is no will?

When someone dies without leaving a will, their estate is passed on to their next of kin, usually a spouse or other immediate family member, in line with the so-called rules of intestacy.

However, the rules state that certain family members cannot inherit. Unmarried partners, step children, and other relatives and friends, irrespective of the role they played in the life of the deceased, will not be gifted anything.

A DOV can still be used if there is no will, allowing you to redirect money to other beneficiaries that would otherwise have been left with nothing.

Adapted form an article in The Telegraph by Harry Brennan


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