Ian Newcombe, partner in our private client team in Exeter, discuses how the recent Autumn Statement will affect deeds of variation.
There was some good news in the Chancellor’s Autumn Statement last week.
The government have confirmed that they do not intend to withdraw the favourable tax treatment that applies to what have become known as “deeds of variation” but have said that they will continue to monitor how these are used.
As many people know, it is possible to make a gift and provided that the gift is either covered by one of the relatively modest annual allowances or the donor of the gift survives by seven years, then there should be no inheritance tax (IHT) to pay on the value of that gift either at the time of the gift or when the donor dies. However, if the gift is of more than £3,000 then the likelihood is that it will only escape IHT liability if the donor does survive for that seven-year period.
It has widely been accepted that this creates a somewhat anomalous position for beneficiaries of estates. Therefore, it has for some time been possible for a beneficiary of an estate who decides that they do not wish to retain all or any part of the benefit that they received from the deceased to give away all or any part of that inheritance. Provided that this is done making use of a “deed of variation” the seven-year rule does not apply.
This is of particular benefit where for example a grandparent divides their estate equally between their children who themselves may already be of an age where they are looking at trying to reduce the potential IHT liabilities that would arise on their deaths later and would prefer that their share of their parent’s estate is passed onto their children (the grandchildren).
If such a gift is made using the appropriate form of deed (which must be carefully drafted and contain some specific wording) then the gift from the parent to the grandchild is treated as if it were a gift by the deceased grandparent in their Will.
There is a strict two-year time limit within which such deeds must be completed and this cannot be extended.
Therefore, the government’s announcement earlier in the year that they intended to review the use of such deeds and whether they were being used to avoid tax in an abusive way caused some concern. It is good news that the government have decided to leave this allowance in place.
These deeds are commonly used and in some circumstances with the appropriate use of trusts can be set up in such a manner as to ensure that not only can the original beneficiary remove the value of the original gift from their estate but that they can also continue to benefit from it or that the benefit can be held in trust until grandchildren and great-grandchildren reach a specific age such as 25.
We would advise that anyone who benefits from an estate should consider, with legal advice, whether or not to enter into a deed of variation to help reduce future liabilities to IHT on value which will of course in many cases already have been taxed on the death of the original testator.
Ian Newcombe is a partner in the private client team at our Exeter office and he would be pleased to discuss tax benefits of using deeds of variation in more detail. Please contact 01392 210700 or email private.client.exeter@stephens-scown.co.uk.