How much Inheritance Tax will you pay?
If, when you die, your estate is worth more than £325,000 your beneficiaries face losing up to 40% of their inheritance to the tax man.
Most assets above that £325,000 allowance are taxed at 40% (unless you’re able to take advantage of the £100,000 Family Home Allowance).
However, there is a loophole that is being increasingly used by the financially savvy to cut Inheritance Tax (IHT) bills.
Deed of Variation
It involves using a little-known law relating to wills, to redirect a deceased person’s assets.
After someone has died, the beneficiaries of their estate – whether it is via a will or the laws of intestacy – can change who gets their assets using a ‘Deed of Variation’.
Anyone who receives an inheritance can use a deed of variation to give all or part of what they have received to someone else.
They just have to have the agreement of everyone who has benefitted from the will and make the variation within two years of the death of the person who’s estate is involved.
A Deed of Variation is “commonly used if the beneficiary doesn’t need the inheritance and so they decide to redirect it to their own children, grandchildren or another person,” says Patrick Connolly, a certified financial planner at Chase de Vere.
They are also often used if a will hasn’t been kept up to date, so to include additional children or grandchildren.
But, you can also use a Deed of Variation to cut the IHT due on an estate.
There are several ways you can do this.
Donating to charity
The simplest is to redirect some of the deceased assets to charity.
Under IHT rules, if 10% of an estate is donated to charity then the inheritance tax rate on some assets in the rest of the estate falls from 40% to 36%.
Another option is to use a Deed of Variation to make an estate skip a generation.
This won’t immediately reduce the IHT bill, but it could help you avoid paying more tax in the future.
“For example, someone in their 80s dies and leaves an inheritance to their child in their 60s,” explains Connolly.
“The beneficiary is already wealthy and is facing an IHT bill on their on estate when they die and so uses a Deed of Variation to redirect the assets to their children.”
Exempt assets and beneficiaries
You could also use a Deed of Variation to alter the distribution of assets to make the most of the IHT rules that exempt certain assets and beneficiaries.
Assets passed to the spouse or civil partner of the deceased are exempt from IHT.
So, if they are receiving assets that are also exempt from IHT you could use a deed of variation to rejig things so that the exempt assets pass to someone who would otherwise be liable for IHT.
For example, if the estate includes a business you could get 50% or 100% IHT relief on it, so you could use a deed of variation to pass that on to children rather than a spouse or civil partner.
Just remember the deed of variation has to be in writing, created within two years of the death and signed by all beneficiaries of the estate.