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Deeds of variation

The Government has announced a review of Deeds of Variation, in response to suggestions that these may be providing an unacceptable method for the better-off to reduce their tax bills.

The principle of the Deed of Variation is that if all the beneficiaries of an estate agree to do so, they can within two years of the death change the terms of the Will or intestacy in such a way that the provisions of the variation will be treated for the purposes of both inheritance tax and capital gains tax as having replaced the Will or intestacy.

Variation might be desirable if a Will were an old one and circumstances had changed since it was written, for example, as a result of births deaths or marriages. It might equally make sense to divert benefits away from elderly beneficiaries, for whom the acquisition of additional assets would simply result in a greater tax liability on their estate.

It remains to be seen what focus the review will take, but there are already ways of saving tax on estates which have official Government approval.

Until 2007, married couples and civil partners with ‘back-to-back’ Wills were potentially at risk of losing the benefit of the nil rate band (which effectively exempts the first slice of an estate from inheritance tax), because transfers between legal partners are already exempt from tax. The nil rate band currently stands at £325,000, but is reduced by the value of any taxable lifetime gifts.

In order to address this situation, the Government introduced transferable nil rate bands, which provide the opportunity to carry forward any unused proportion of the nil rate band from the death of the first partner to the death of the second.

Consequently, there would be no need to consider a Deed of Variation if, for example, the intention of a testator who had inherited their deceased partner’s nil rate band were to direct part of the acquired estate to their offspring.

The surviving partner could instead make gifts to the offspring which, as ‘potentially exempt transfers’, would become exempt from inheritance tax after seven years. Also, assuming a full carry-forward of the deceased partner’s nil rate band, £650,000 of the surviving partner’s own estate would be free of inheritance tax on their own death.

Of course, to the extent that an estate consists of undrawn pension assets, testators can now nominate beneficiaries to whom the entire fund can pass free of inheritance tax. Furthermore, the beneficiaries can themselves nominate their own beneficiaries, so that the wealth cascades down through the generations.