Your Will & Reducing Inheritance Tax

Last autumn, HMRC released its new Inheritance Tax (IHT) revenue figures for payments received in 2021. The government collected a record of £5.4bn death duties, with July reaching the peak when a record £571 million was received.

This unprecedented rise in IHT revenue is due to several things. Increased house prices, coronavirus deaths, delays in issuing Grant of Probate and frozen tax breaks (such as Stamp Duty). What’s more, by 2026, revenue from IHT is likely to reach £6.6bn, with three out of five families paying tax.

What can you do to reduce IHT?

Deeds of Variation & Saving IHT

A deed of variation (also known as a deed of family arrangement) allows beneficiaries to change their entitlement from a Will after the person has died.

Permitted Variations

Changes may be complex or straightforward and commonly include:

Reallocating specific assets to specific individuals
Reallocating your entire inheritance
Setting up a trust

Example

Alex knows she is about to inherit a windfall from her father that will take her Estate over the threshold of £325,000 (after which 40% IHT applies). However, a DOV allows Alex to change the terms of her father’s Will, passing the windfall directly to other beneficiaries, reducing the amount of tax otherwise due after her death.

Alex chooses to redirect a third of the inheritance from her father to a charity and the remainder to her grandchildren via a Discretionary Trust for their benefit later.

Gifting to a charity reduces the overall tax liability on Alex’s Estate to 36% because the donation she makes is equivalent to 10% of the value of her entire Estate.

Alex, 52, is fit and healthy and confident that her gift (under the £325,000 tax threshold) into her grandchildren’s Trust will not fail the seven-year rule. Instead, the Trust will make sure Alex’s grandchildren leave University without colossal debt.

The Rules

A beneficiary makes a deed of variation before or after the Executor(s) gets the Probate Grant. Changes must take place within two years following a person’s death. Provided everyone involved agrees, you can redirect your inheritance to anyone, even if they do not benefit from the original Will.

Remember, once you make variations, you can’t change them again. Furthermore, you should always consult a chartered accountant regarding tax advice. They will explain the tax implications in full, be they inheritance tax (IHT), capital gains or income tax-related. This HMRC checklist helps determine whether your situation satisfies the legal requirements.

The cost of drawing up a DOV will vary according to the complexity of the changes and the number of beneficiaries involved. However, depending on your situation, it could save many thousands and protect those you love.

If there is no Will

If a person dies without a Will (intestate), beneficiaries can make a deed of variation. However, the same rules apply. All beneficiaries who stand to inherit under the laws of intestacy need to agree with any changes in writing.

The situation can be particularly complicated if there are minor or incapacitated beneficiaries when a court application and permissions are needed.

Our Advice

For further information, advice about making a Will, Estate Planning or an instant quotation, please contact us. We’re here to help.

Please note that all views, comments or opinions expressed are for information only and do not constitute and should not be interpreted as being comprehensive or as giving legal advice. No one should seek to rely or act upon, or refrain from acting upon, the views, comments or opinions expressed herein without first obtaining specialist, professional or independent advice. While every effort has been made to ensure accuracy, Curtis Parkinson cannot be held liable for any errors, omissions or inaccuracies.