InsightsInsight - Wills and Probate - POSTED: March 14 2018
A second bite of the cherry: Deeds of Variation and post-death estate planning
As the beneficiary of an estate, what can be done if it becomes apparent that it would be better to change the destination of what you have inherited? Is it possible to alter the distribution of an estate?
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The short answer is yes; in these circumstances, a Deed of Variation could enable you to formally redirect an inheritance to different beneficiaries.
For those that are unfamiliar with Deeds of Variation, these are a tool that allows someone who has inherited assets from a deceased relative to redirect those assets to a new beneficiary or beneficiaries. A Deed of Variation can either redirect an inheritance under a will or redirect an inheritance under the rules of intestacy i.e. the rules that apply if no valid will is in place.
This is particularly useful from a tax planning perspective because if a Deed of Variation is undertaken within two years of death, the gift to new beneficiaries is treated for inheritance tax (IHT) and capital gains tax (CGT) purposes as though it was left by the deceased at the date of their death, rather than by the original beneficiary with all of the associated tax consequences that arise as a result of making an ordinary gift.
As such, Deeds of Variation can prove a particularly useful tool in farming estates to help with post-death estate planning where a preferable tax outcome might be better achieved if certain assets in an estate were to pass and be left to other beneficiaries.
Mr Jones, a landowning farmer, leaves his entire estate under the terms of his will to his surviving wife, Mrs Jones.
The land in Mr Jones’ estate is eligible for Agricultural Property Relief (APR) and his interest in the family farming partnership is eligible for Business Relief (BR) from IHT.
As Mr Jones is leaving his entire estate to Mrs Jones, the estate is spouse exempt from Inheritance Tax (IHT) altogether and whilst no IHT therefore arises as a result of his death, the APR and BR in his estate are not utilised.
This could result in an increase in IHT in the future on Mrs Jones’ death, if she either stops or reduces undertaking agricultural activity or if the rules on APR and/or BR change in the future before her subsequent death. The latter is particularly relevant bearing in mind that the Government has recently published a report on APR and BR, which commentators have suggested might be a prelude to restricting certain aspects of the reliefs at some point.
In order to circumvent possible future exposure to IHT, Mrs Jones might consider the use of a Deed of Variation to redirect the inheritance of assets eligible for either APR or BR to non-exempt beneficiaries such as children or family trusts, in order to avoid those assets inflating the value of her own estate and possibly becoming subject to tax on her death.
Much will depend on Mrs Jones’ own personal circumstances and the nature of the type of assets in question but a trust which includes her as a potential beneficiary, might be the preferable way to proceed. This would allow Mrs Jones to continue to benefit from the redirected assets if needed. Likewise if any of the land in Mr Jones’ estate might be eligible for future development, a trust would allow the family to assess over time which of the next generation might benefit and when.
On the other hand, if Mrs Jones is otherwise financially independent and circumstances are straight forward, she could choose to redirect the inherited APR and BR assets outright to their children without the complications of a trust arrangement.
Whether Mrs Jones chooses to redirect the assets directly to her children or into a trust, a Deed of Variation facilitates the required outcome.
The benefit of using a Deed of Variation therefore lies in its ability to offer a ‘second chance’ for families to undertake an estate planning advantage in a tax efficient way, whilst also taking into account personal family dynamics and the wider circumstances at the relevant time.
There are other specific requirements that must be met in order for a Deed of Variation to be successfully completed and as such you should seek legal advice in order to find out more about these requirements and if a Deed of Variation is the best option for you.
This article was first published in the March 2018 edition of South East Farmer.
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