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18th March 2015

The Budget 2015 - Deeds of Variation to go?

In a shock announcement today the Chancellor warned that Deeds of Variation may be the next tax planning tool to be attacked.

There is to be a consultation on whether to change the legislation to remove the tax advantages linked to Variations.

A Deed of Variation can presently be made within 2 years of a death, to re-organise the terms of the deceased person’s Will (or Intestacy if there is no Will). The original beneficiary can choose to have the change treated as if made in the Will and taking effect from the date of death, which gives great Inheritance and Capital Gains Tax benefits. It is often used to enable a wealthy adult child to “skip a generation” by redirecting his inheritance to his children – thereby avoiding the second chunk of Inheritance tax which HMRC would otherwise get when the adult child dies. There are vital similar uses for Will Trusts.

Many people have a Will which contains a Discretionary Trust. This may be of the whole estate or of the nil rate band amount. At present their heirs can rearrange the Trust, within 2 years of the death, taking advantage of hindsight at the date of death as to the tax situation and family needs. This could also be attacked.

Variations are often used to take advantage of the only time a person can really have their cake and eat it: a discretionary trust can be created after someone’s death which allows the original beneficiary to remove the inheritance from their own taxable estate, but at the same time retain access to the inheritance.

Whilst variations are a key tax planning tool, they are linked to benefits of a non- tax kind. For example, the Discretionary Trust may have been created because the person making the Will could not be sure in advance of the family situation when he dies – is one child going through a divorce? Has another beaten a debt/drink problem? Will another child need a Disabled Trust setting up? Did one child receive a lifetime gift which needs to be balanced up after death? Did the person die before his time, leaving an Intestacy mess to be sorted out?

A change in this law could affect everyone with a pre 2007 Nil Rate Band Discretionary Trust legacy Will; everyone with a Discretionary Trust Will; everyone hoping to do some tax planning after a death and everyone without a Will.

If you’ve inherited within the last 2 years and are considering a Variation – the government typically allows a transition time within which you can still act, even if they are abolished for everyone else.

Many years ago a previous government consulted on whether to abolish Variations. The decision then was that Variations put the voter who didn’t have the money or time (or sense) to take good professional advice, back on a level playing field with those who had taken advice in time from a solicitor.

That time Variations were saved. This time we don’t even know which government will be in power when the consultation ends.

For more information on this article please contact Carolyn Bagley on 01908 247015 or click here to email Carolyn.

For more information on our Inheritance Tax services click here.

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