November 2, 2015

Tax planning or tax avoidance? Deeds of variation under review

Deeds of variation are used to alter the terms of a Will or intestacy after someone’s death. They can alter a beneficiary’s share of an estate, which could have an impact on inheritance tax.

The deed must be entered into within two years of the date of the death and can be used in many situations. They are particularly useful where individuals have been badly advised as to their Will, where individuals were not aware of legal developments or where they perhaps died suddenly without having made alterations to their Will or intestacy to reflect their true wishes.

Additionally, there can be considerable tax benefits. If, for example, a beneficiary anticipates that their own estate will be subject to inheritance tax on their own eventual death, they may decide to vary the terms of the Will under which they stand to inherit to instead put the assets into a trust or to re-direct their inheritance to their own children. This can avoid a potential double charge to tax.

The review suggests that this currently legitimate means of tax planning may, if legislation changes on 25 November 2015, instead be viewed as tax avoidance by the authorities and so disallowed. This could have extensive tax implications for beneficiaries, so it’s important for any executor or beneficiary who believes that they may require a deed of variation to organise this before any changes to the legislation.

I would also strongly recommend that anybody who had previously drafted their Wills or planned their estates with deeds of variation in mind, to review their estate planning situation.

Commentators do not envisage that anyone who has already made or makes a deed of variation prior to the Government’s final decision will be retrospectively penalised. Indeed some believe that the announcement of the review was simply politically motivated (given its timing just before the election and with Ed Milliband having been identified as having avoided tax through using a deed of variation) and will not lead to any changes being implemented.

It may be safest, though, to act while the currently available benefits remain certain.

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