Unlocking the Inheritance Tax Loophole: The Deed of Variation

Inheritance Tax (IHT) can be a daunting financial burden for families inheriting estates, especially in light of recent changes and potential future regulations. However, with the right strategies, families can effectively reduce their tax liabilities. One such method gaining traction among financial advisers is the deed of variation.

What Is a Deed of Variation?

A deed of variation is a legal document that allows beneficiaries to modify the distribution of an estate within two years of the deceased’s passing. This tool can help redirect some or all of an inheritance to others, such as children or trusts, ultimately reducing the estate’s IHT liability.

Simon Bashorun, head of advice at Rathbones Private Office, notes a significant rise in interest surrounding this strategy. “Families often want to ensure assets align with long-term financial goals while maximizing potential IHT efficiencies,” he explains.

How Does a Deed of Variation Work?

This powerful tool enables beneficiaries to adjust the terms of a will and how an estate’s assets are distributed. The redirecting of gifts is treated by HMRC as if they originated directly from the deceased, which can significantly mitigate IHT liabilities.

Example Scenario

For instance, if a child inherits more than they require, they could use a deed of variation to pass some assets directly to their children, thereby skipping a generation. Rebecca Williams, divisional lead of financial planning at Rathbones, points out that while this doesn’t yield immediate IHT savings, it can potentially save 40% on future liabilities when the child eventually passes away.

The Benefits of Using a Deed of Variation

1. Tax Savings: Altering the beneficiary from a child to a grandchild can streamline IHT payments. This means IHT is only paid once, by the grandchild, rather than twice.

2. Charitable Contributions: Including charitable donations can lower the taxable estate value and reduce the IHT rate from 40% to 36%, provided at least 10% of the estate is designated for charity.

3. Asset Protection: This method can safeguard assets for minors or keep them out of personal estates, shielding them from potential divorce settlements or long-term care fees.

Additional Uses

A deed of variation can also:

• Include a child or grandchild not mentioned in the original will.
• Benefit stepchildren.
• Reflect changing family dynamics.

How Much Can You Save with a Deed of Variation?

Scott Gallacher, a director at Rowley Turton, emphasizes that he is now consulting on deeds of variation with nearly every client due to the recent IHT scrutiny, particularly concerning pensions. “In many cases, this approach can lead to six-figure IHT savings,” he asserts, urging families to consider this option promptly, despite the difficult discussions it may entail.

Samuel Mather-Holgate, an independent financial adviser, also acknowledges that these deeds have not been fully utilized in the past but suggests that the recent IHT amendments are prompting families to reassess their options.

Conclusion

The deed of variation is a powerful yet underutilized asset in the inheritance tax landscape. As families navigate the complexities of estate distribution and tax liabilities, understanding how to leverage this tool can lead to significant savings and protect wealth for future generations.

For those facing inheritance issues, consulting with a financial adviser to explore a deed of variation could be a worthwhile investment in securing family legacies. With the potential for savings and protective benefits, it’s a strategy that families should consider sooner rather than later.