A study in gifting – too late to change after death?

Generally, once a gift has been made it cannot be ‘undone’ as doing so cancels the inheritance tax planning objectives. However, where someone’s estate is concerned, it is possible to re-write the deceased’s inheritance strategy, as specified in their will, or under the rules of intestacy where there is no will, after their death. This can be achieved using a deed of variation.

Deed of variation

Where it is the case that a beneficiary under a will, or under the rules of intestacy, wishes to redirect their entitlement to someone else, a deed of variation can be drawn up to facilitate the required change. Such a change may be deemed appropriate where:

• The will is unclear.
• Benefits are to be allocated differently between beneficiaries.
• Someone is not included in the will – for example, a grandchild not born when the will was drafted.
• Someone is not covered under the rules of intestacy – for example, a step-child or an unmarried partner.
• A trust is to be used to hold the assets.
• The amount of CGT and IHT payable can be reduced.

The beneficiary making the variation must be over age 18, of full capacity and be absolutely entitled to the share being varied. Also, all beneficiaries that have a beneficial interest must agree to the proposed variation. The deed must be executed within two years of the testator’s death and be signed by all executors and affected beneficiaries.

Tax

A deed of variation can be effective in mitigating CGT and IHT (but not income tax) as follows:

CGT

An election must be made under s26(6) of the Capital Gains Act 1992 for a deed of variation to pass on an asset to a beneficiary. This uses the base cost at the date of death rather than being treated as a disposal by the beneficiary who is foregoing their entitlement to the asset.

IHT

If all the required conditions for setting up a deed of variation are satisfied, it will be treated as having been made by the deceased for IHT purposes (s142 of the Inheritance Tax Act 1984).

The deed could redirect benefits from a beneficiary to the beneficiary’s children where the beneficiary does not need the benefit for themselves. This will therefore be treated as a gift by the deceased to their grandchildren (rather than the beneficiary making the gift that could impact their own allowances).

A beneficiary could also redirect their benefit so that more than 10% of the net estate was given to charities resulting in a reduced IHT rate of 36% on that part of the estate liable to IHT.

Income tax

A deed of variation has no effect for income tax purposes. If a beneficiary redirects their entitlement to a trust then they are deemed to be the settlor for income tax (but not for IHT) purposes. So, for example, if it was a discretionary trust holding an investment bond, any chargeable gain liability arising would fall on the beneficiary and not the trustees.

A useful tool for estate planning

So, whilst it is always best to ensure that a will is drafted appropriately, reviewed regularly and updated where necessary so that the testator’s assets are transferred as intended, a deed of variation may provide a useful safety net where all impacted  beneficiaries agree, post death, that changes are needed to achieve a fairer (and potentially more tax-efficient) distribution of the estate.

If you have any questions, please feel free to contact the Technical Services team.

All information is based on our understanding and interpretation of applicable law and regulation.

 

 

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