Deeds of Variation - is their time up?

Entering into a Deed of Variation within two years of a person's death to alter the destination of a deceased's assets has long been an accepted mechanism by which families can legitimately reduce their exposure to Inheritance Tax.

Inheritance Tax is a tax payable on the value of an Estate of a deceased person. Under the present rules, Inheritance Tax is payable at the rate of 40% on the value of the Estate over the nil rate band currently set at £325,000. Married couples and registered civil partners can have a combined threshold of £650,000 before Inheritance Tax becomes due.

Parties can take a number of steps to reduce the Inheritance Tax which may be payable by taking such steps as gifting property to someone during their lifetime, for example. A Deed of Variation can also be used after someone's death as a tax planning tool.

A Deed of Variation can be used by a beneficiary to redirect some or all of his inheritance to somewhere else. Provided the Deed is entered into within two years of the date of death and all beneficiaries agree, this can have the effect of reducing the Estate for Inheritance Tax purposes.

The Leader of the Opposition, Ed Miliband, has come under some criticism recently for using a Deed of Variation on his father's death which may have had the effect of reducing the amount of tax payable.

In the Budget 2015 (delivered on 18 March 2015) the Chancellor of the Exchequer, George Osborne, announced that HM Treasury will be reviewing various tax avoidance measures, including the avoidance of Inheritance Tax through the use of Deeds of Variation. The Report is promised by the autumn.

Deeds of Variation are a legitimate tax planning exercise and, given the current uncertainty around their use in the future, best advice is to consider entering into such a Deed sooner rather than later to try to take account of any future changes in this area.

If you would like to discuss this or any other aspect of Probate or Estate Planning, contact us.