An inheritance sometimes creates tax or state benefit issues for the person receiving it. What are these potential issues and can anything be done about them?
I’d like to gift (tax efficiently) my inheritance to my children
Dad who inherits assets may not want these because it either creates or increases his own inheritance tax bill on his death. It may, therefore, be more beneficial to pass these assets down to the next generation now (who may hugely benefit from an early inheritance to help them, say, get on the property ladder) whilst reducing the value of Dad’s estate for inheritance tax purposes.
If Dad gifts these assets to his children now then he would need to survive for 7 years for the value of those assets to be outside of his estate for the purposes of inheritance tax. If, however, he gifted these by a compliant Deed of Variation then there would be no 7-year rule and therefore no inheritance tax issue in relation to his gifts.
So what is a Deed of Variation and why does it work?
A Deed of Variation is a legal document that consists of two elements.
Firstly it acts as a Deed of Gift setting out exactly what is to be gifted and to whom. Secondly, it acts as a ‘tax fiction’, in that if it is drafted in the right way and signed within the time limits then HMRC will regard anything gifted as coming from the person who has died and not from the person actually doing the gifting. This is why the 7-year rule mentioned above is circumvented.
Does a Deed of Variation avoid inheritance tax in other ways?
A Deed of Variation can be used to take inheritance out of a person’s estate if that person dies soon after coming into the inheritance. For example, Mum passes away leaving her estate equally to sons Jason and Chris but sadly Chris dies very shortly afterwards leaving his estate to his two children.
At this point, half of Mum’s estate now belongs to Chris’ estate and this has increased the inheritance tax bill by 40% on everything inherited by Chris’ estate. Chris’ children use a Deed of Variation to redirect the half share of their grandmother’s estate from Chris’ estate directly to them, so decreasing the value of their father’s estate and therefore decreasing the amount of inheritance tax that they will have to bear.
So if we said that the share of their grandmother’s estate which now belongs to Chris’ estate is valued at £500,000 and is fully charged to inheritance tax at 40%, the tax bill on this is £200,000. However, Chris’ children have used a Deed of Variation to redirect this £500,000 inheritance from their father’s estate directly to themselves hence saving the £200,000 tax bill.
Are there any potential Stamp Duty benefits?
There may be some Stamp Duty saving; let’s say Mum passed away leaving her home subject to an equity release to her son who now wishes to raise finance on the Property but in order to raise the finance the Property must be put into both his and his wife’s names.
There is a potential Stamp Duty charge which could be exasperated by having to pay the higher rate if they already own other property. This is because HMRC will regard the wife’s payment of half the existing equity release debt as being a chargeable consideration. This repayment of the equity release could be regarded here as a ‘purchase price’ and if this exceeds the Stamp Duty Land Tax threshold then tax will be payable.
A Deed of Variation gifting the Property equally to the son and daughter-in-law would mean that HMRC would regard the daughter-in-law as having acquired the property (subject to the equity release) from her late mother-in-law’s estate.
As HMRC regards the daughter-in-law as already being entitled to the Property at the time it is remortgaged, then there is no purchase of the property and therefore no chargeable consideration and no Stamp Duty Land Tax to pay.
Are there any potential benefits from a Capital Gains Tax perspective?
Mum passes away leaving her home subject to an equity release to her son, as above, but this time the son pays off the equity release from his own cash assets and has decided to rent the Property out.
After 1 year he decides to sell the Property but as it has increased in value and falls above his own Capital Gains Tax allowance, there will be Capital Gains Tax to pay. The son could use the Deed of Variation to transfer the Property into the joint names of himself and his wife, thereby using two Capital Gains Tax Allowances rather than just one – so reducing the tax bill.
Can a Deed of Variation help safeguard against losing my benefits?
Using a Deed of Variation probably won’t help in this case, as with means-tested benefits a person will likely be regarded as deliberately depriving themselves of assets and possibly assessed by the State as owning those assets. This applies even though they have in fact completely given their inheritance away. The State probably will not make a decision at the time the person comes into the inheritance, as they usually only assess the financial position of a person receiving benefits on their intended review date, say, every 5 years.
The risk to a person entering into a Deed of Variation to deprive themselves of their inheritance so they can keep their benefits as they were before the inheritance, may find that they have to give benefit monies back to the State. This could create great hardship, as they may not be in a financial position to do so and having gifted their inheritance they are unable to get this back.
In Conclusion
It is important to get a Deed of Variation right, as there are legal formalities and time frames to observe. You may be thinking of asking “do I need a Solicitor for a Deed of Variation?” and “how long does a Deed of Variation take?”.
The Deed of Variation is a powerful tool that needs to be bespoke to a person’s individual circumstances and this is why it is important to seek proper legal advice to ensure that it works in the way that you want it to. It usually takes 2 weeks to prepare a Deed of Variation from the time of receiving instructions.
If you feel that you need help in this area, contact Jensen Bourke today at Cunningtons
on 01273 725 229.
I intend a Deed of Variation of Intestacy and to have this written back to date of death by adding relevant statement re IHT and CGT. My aim is to divert part of my inheritance (sole next of kin) to my family member whilst retaining remainder. IHT has been paid from estate and want a property and part of remaining money to the new intended beneficiary. Not sure how this part (so that I have been accountable for IHT on whole estate and not the new beneficiary. Also I have been advised re “incorporation of a notional will” with wording as if the deceased wrote it and naming me as Executor within (I was Admistrator as intestacy), and with the Deed not naming the new beneficiary, nor stating what is my intention re what goes to the new beneficiary and have concerns as know it is important for all to be correct first time. Please advise of any pitfalls re this.
Thank you for your comment.
We would need to discuss your case more fully to advise you, so please feel free to contact us to make an appointment to discuss your issue.
I am expected to inherit a percentage of the property of my father’s estate split between 4 siblings. For the purpose of reducing my future IHT, I wish to redirect my share of the inheritance away to my 3 adult children by using a deed of variation. In doing this, will it affect my children to lose their first-time buyer status?
Thank you for your enquiry. A deed of variation can only be executed after someone has died and for tax purposes is only effective if signed within the two days after the date of death.
If your father’s property is sold and the net proceeds of sale split between your children then no, it will not affect their first time buyer status as they will not have owned the property. If however the property is transferred to them then yes, as they own a property they will no longer be first time buyers if they go on to buy a property in the future.
Is the transfer of a property using a Deed of Variation a one-stage or a two-stage process? The deceased’s daughter was left the property in the Will, but she made a Deed of Variation to re-direct the property to the deceased’s grandson. So, does Land Registry have to transfer the Title to the daughter first, then the daughter transfers the Title to the grandson……or can the Title be transferred direct from the deceased to the grandson?
Thank you for your enquiry. The Deed of Variation varies the terms of the Will or intestacy and redirects the asset. It is as though the deceased made the gift under the terms of their Will. Therefore in your example the deceased’s daughter has no entitlement to the property it is to pass directly to the grandson provided the grandson is over the age of 18 years.
When a percentage of property is handed down by a parent to adult children on death of one of parents(deceased percentage) by deed of variation. Then more than 7 years after the surviving parent passes and there is no IHT to pay. What’s tax implications for the percentage handed down by deed of variation as there is 100 percentage incease at time of death of remaining parent.
If this was cash then after 7 years there is no tax implications.
Thank you for your enquiry.
If a deed of variation was used this means the terms of the deceased’s Will or intestacy were varied so it’s as though the gift came from the deceased, this means the seven year rule does not apply as it only applies to gifts made during someone’s lifetime (such gifts are known as potentially exempt transfers).
As you have inherited a property you inherited it at the value as at the date of death, if the property is not your main residence then on sale you will be taxed on the gain in value since the date of death, this tax is known as capital gains tax. You must report and pay the tax within 60 days of the sale, you may be able to claim the annual allowance and deductible expenses depending on your circumstances. It is vital you seek tax advice prior to any sale as the advice will be specific to your circumstances.
Hello,
I’ve been left a percentage share of an estate split between 6 beneficiaries. Am I correct in thinking, if a deed of variation is done to benefit me solely, no stamp duty will be payable?
I intend to re-mortgage the property during the process to pay the other beneficiaries their share. Am I right in thinking, this will avoid all capital gains tax for them due to me gifting them the money from the re-mortgage?
I understand this has to be done within two years.
Thanks in advance.
Thank you for your enquiry. The advice given below is generic advice, if you would like advice specific to your situation please contact us and we can discuss your circumstances in more detail.
When someone dies their estate may be subject to inheritance tax, depending on the value of their estate. The terms of the deceased’s Will or intestacy can be varied to redirect part of the estate elsewhere, if it it done within two years of the date of death (and the deed of variation is drafted correctly) then the effect for inheritance tax is that the gift is written back it to the Will, I.e for tax purposes it is as though the gift came from the deceased and not the original beneficiary. For a deed of variation to be varied it must be entered in to for no consideration, this means the original beneficiaries cannot receive anything as part of the transaction. For example, it will not be tax effective to change the disposition of a Will but promise to give the original beneficiary something at a later date which appears to be what you are hoping to do by remortgaging the property and giving beneficiaries the funds later.
Capital gains tax is payable when the deceased’s assets (including property) sell for more than the date of death valuation. It may be possible to mitigate the capital gains tax liability by the executors appropriating the property to the beneficiaries prior to sale. This means that each beneficiary may have use of their own capital gains tax allowance. You will need to take advice on this matter.
If you wish to buy the other beneficiaries’ share of the property then stamp duty will be payable on what you are buying. If you already own a property please bear mind that you will be paying higher rate stamp duty.
As I have said above it is really important you seek advice pertinent to your specific situation to ensure you proceed in a tax-efficient way.
I have been left half of my unmarried brothers estate for which all IHT has been paid and the Grant of Representation issued. I wish to give some of my inheritance to my children to reduce my future IHT.
If I transfer the inheritance into my bank account and give some of it to my children now before creating a deed of vatiation., is it possible to create a deed of variation later (within two years) and ‘top up’ the amount given to some higher amount which I define in the DoV. Will the earlier gifts be outside my estate, assuming I survive until the DoV is signed?
Thank you for your enquiry, please accept our condolences on your loss.
To be effective for inheritance tax purposes you must execute the Deed of Variation prior to making the gifts (and as you correctly say within two years of the date of death of the person who you have inherited from) otherwise the transfer of funds to your children will be deemed to be a potentially exempt transfer, meaning the value of the gift will fall back within your estate if you die with seven years of making the gift.
Each individual circumstance is different and I would suggest making contact with us directly so we can advise you on your specific situation.
My parent is in receipt of universal credits and has been left £25,000 from his deceased father. He does not want the money at all as not receiving the money far outweighs having it. He is also in receipt of disability allowance and loosing his means tested benefits would have a great impact on him and his medical/physical needs. He is not able to work and has lots of health issues. He wants me (his only child) to have the inheritance through a deed of variation. If he refuses the inheritance and states his wishes are for me to have it, would this affect his entitlement to benefit? If he lost this, he wouldn’t be able to afford his house which his rent is currently covered.
Probably as with means-tested benefits a person will likely be regarded as deliberately depriving themselves of assets and possibly assessed by the State as owning those assets.
The State will probably not make a decision at the time the person comes into the inheritance, as they usually only assess the financial position of a person receiving benefits on their intended review date, say, every 5 years. The risk to a person entering into a Deed of Variation to deprive themselves of their inheritance in order to keep their benefits in the same position they would have otherwise been in, but for the inheritance, may find that they have to give benefit monies back to the State later on.
Please bear in mind that the inheritance and variation thereof must be disclosed in any financial assessment.
After the death of a brother, monies were divided between beneficiaries,
with over £2000 going to my disabled
son. We had a variation of deed done
through a reputable solicitors firm, which enabled my son’s mother to have thee money passed onto her, so that
monies could be cared for in our son’s
interest, and thus preventing him losing
his state benefits.
If my wife placed the money
in a saving’s account for our son’s needs, would this money be seen
as her income in a scenario where
she may at an unforeseen time need to be assed for various forms of care in the community?
Yours Sincerely,
Peter Murphy
Hello Peter, thank you for your comment.
Regarding your query, it depends on whether the mother is holding the monies as a trustee for your son. If she is, then the income and capital belong to the trust and not to her and therefore would not be assessed for her care.
If, however, the monies in question are really hers and she regards these monies informally as set aside for her son’s benefit as she sees fit and on an ad hoc basis then yes, these would be included in any assessment for care.