Matthew Newton Wealth Management Ltd

Senior Partner Practice of St. James's Place Wealth Management


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An awkward legacy

18 February 2015

Sometimes an inheritance serves mainly to increase a recipient’s tax bill; but the problem can be avoided.

There are times when a good thing can turn out to be not such a good thing after all. Though it may seem counterintuitive, receiving an inheritance can sometimes be unwelcome for tax reasons. If that should happen, there is something that can be done about it.

Although the circumstances may have been distressing, an inheritance is usually a positive event. However, Inheritance Tax (IHT) may shed a different light on it, since these assets will be taxed again on the recipient’s death.

For many recipients of an inheritance who want, in turn, to hand on their wealth when they die, IHT can mean that there is less available for heirs and loved ones.

Do the deed

With better advice, a Will could have been written to set up a trust for the benefit of the recipient and their family, which would ensure that the inheritance did not form part of their estate for IHT purposes. But even if a trust wasn’t used, there is a solution: a deed of variation.

If the death occurred within the last two years, any inheritance beneficiary should be able to execute a deed of variation. This allows the recipient, in effect, to rewrite the Will and put the inheritance into a trust. As long as the deed is completed within two years of death, it will be treated, for IHT purposes, as if the Will had been written this way from the outset.

The advantage of a deed of variation is that it allows individuals to benefit from the trust without the assets being treated as part of their estate – and liable to 40% tax – when IHT is levied. Under trust law, the rate of IHT could be reduced to 6% of the trust’s value every 10 years – and is often even lower.

Deeds done

That’s the remedy, but what circumstances can give rise to the problem? One of the most common to occur is when someone inherited an estate but has a limited life expectancy. Without a deed of variation, this raises the prospect of two IHT charges on the same asset within a relatively short space of time.

Another typical situation is where a beneficiary can afford to pass on some or all of an inheritance to their children. Normally, if assets are gifted to children, the donor needs to survive seven years for the gift to escape IHT. With a deed of variation, the assets move outside the IHT net immediately.

If the deceased had assets which qualified for Agricultural Property Relief or Business Property Relief, trusts can double the available tax savings. A deed of variation is also helpful whenever an inheritance goes to someone who is domiciled abroad; placing assets in trust can ensure that they stay completely outside the scope of IHT for the foreseeable future, even if their own beneficiaries are domiciled in the UK.

Another situation in which a deed of variation should be considered is where the deceased has left a trust in their Will, but it is not flexible enough to allow IHT savings to be made on the family home.

Multiple uses

The beauty of the deed of variation is that it can be used to vary any gift occurring on death, as long as the beneficiary is over the age of 18. It’s not necessary for all beneficiaries of a deceased’s estate to enter into a deed of variation. Individual recipients can choose to make this decision based entirely on their own entitlement. And a deed can be put in place even if the deceased didn't make a Will at all.

Case study - A substantial saving

The widowed Mrs White dies, leaving everything – a total of £250,000 – to her only son, Mr White. He is not married but has children. He would like access to the money but his estate is already in excess of his own £325,000 nil-rate band. Anything he inherits from his mother, therefore, will be subject to IHT at 40%. Mr White executes a deed of variation, which redirects his mother’s estate into a trust, with himself, his children and grandchildren as beneficiaries. On his death, up to £100,000 will be saved (40% of £250,000) for the benefit of his heirs. Mr White still has access to the money and, as a trustee, retains control over its distribution and investment.

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.

Will writing involves the referral to a service that is separate and distinct to those offered by St. James's Place. Wills and Trusts are not regulated by the Financial Conduct Authority.


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