24th August 2023

A Tale of Two Deeds of Variations

Suffering the death of a family member or any other loved one is a difficult time which can be made even worse if there is no Will or ‘an inappropriate Will’ which does not fit changed circumstance.

I use the term ‘an Inappropriate Will’ as an umbrella term to cover circumstances were the Will has become out of date by reason of changed personal circumstances, or changed financial circumstances, or a mistake in the original Will or a change in tax laws by date of death et cetera.

Fortunately, at present, we do have the ability to amend a Will by a Deed of Variation to incorporate new terms into the Will or make a change to the terms of the original Will or indeed where there was no Will/ no valid Will previously – in other words to take the place of the statutory intestacy provisions to have a deemed Will.

We can also, after the event ( death), sever joint tenancies to assets like joint bank accounts and, indeed joint tenancy held houses land flats etc.

In this particular case, an individual had died without a Will in place at all, and, as a single person with no children or grandchildren, it fell to the deceased individual’s nephews and niece under the intestacy provisions to take the estate.

One of those persons wished to look at some future inheritance tax planning. Indeed, they had discussed with their financial advisor and their financial advisor had made a recommendation which the client then sought to implement by talking with us.

The instructions we advocated were to vary their own entitlement (and solely their own entitlement) from their hands beneficially to a discretionary Will Trust, to be found within the terms of the Deed of Variation itself.

They, and their choice of family members were appointed as trustees of that arrangement. The class of potential beneficiaries included that individual, their spouse, their children and grandchildren. It is only persons who are named in the variation as potential beneficiaries whom the trustees can legitimately consider making some form of appointment of physical assets out to – if a person is not named as a potential beneficiary or does not come within the class description of/as a beneficiary, they cannot have assets appointed out to them.

The trustees, having received investment advice from their Financial Advisor, invested the trust fund in an investment bond, so as to tame other issues such as income tax and capital gains tax , which otherwise with a Discretionary Trust could slightly cut back on the attractions of the arrangement (the income tax rate applicable to Discretionary Trusts being 20% on the first £1,000 worth of income arising in any one taxable year, and thereafter at the ‘rate applicable to trusts’, currently, being 45%, by way of example), as well as seeking to minimise the ongoing tax compliance costs.

Whilst this is not the place for a detailed explanation of the benefits et cetera of Investment Bonds ( because the writer is not a financial advisor and does not seek to usurp their qualifications, status and importance), the use of a Bond here did allow income gains to mount up in an income tax attractive environment without an immediate charge to income tax. This benefits the rate of potential growth of the Trust Fund quite significantly over say a 10 year or more time-period.

The client who carried out the variation was, and is a potential beneficiary; if, therefore, they ever required funds out of the arrangement in the future, then the trustees as a group could appoint assets to them.

Now, as this was a Variation, the legal position is that it takes the place of the terms of the original deceased’s Will ,or, where there is no Will, it is as if the original deceased had made a Will incorporating the terms of the Variation.

As such, it is not seen in Inheritance tax law or Capital Gains tax law as being the act of the person making the Variation, but that of the original Deceased the instant before their own death, and as such there is no additional Inheritance tax charge point other than the death of the original Deceased.

So, there is no ‘survivorship period’ required, unlike gifts or usual transfers to trust, being in both cases currently 7 years.

A variation is ‘safe’ from adverse IHT implications as soon as it is signed by all signing parties to it. So, taking a grim outlook, if the person making the variation dies a year later, the variation does not then eat into their own Nil Rate Band Allowance, and so it is always Inheritance tax efficient

In addition to that attraction, the variation can look to do things that a lifetime transfer into a discretionary trust cannot allow for, without falling foul of the one of the twin tax law perils of:

‘Gift with Reservation of Benefit’; or ‘Pre-Owned Assets’ ,

Both being important Revenue tools designed to shut down the use of various historically much used Inheritance tax planning arrangements.

Neither Gift with Reservation of Benefits nor Pre-Owned Assets have any hold over arrangements originating out of death of the original Deceased. So, the ability of assets potential coming by a future Deed of Appointment back to the person making the Variation is an option with a Variation, where it is not with usual lifetime created pieces of Inheritance tax planning.

This is also a great example of where a Financial Advisor and a Solicitor, working together, can achieve the best outcome for their mutual client; neither the Financial Advisor nor the Solicitor working on their own, without the insight and assistance of the other, would be able to put together such a comprehensive and beneficial solution for the client.

All clients are different and will have different needs and wishes and, indeed, the need for and precise terms of any variation are equally ‘bespoke’.

If you have received an inheritance from a person who has died not more than two years ago and you wish to have an initial conversation as to whether or not a variation may be appropriate for you, in your own circumstances, (particularly as to whether it is cost efficient or otherwise), please contact our Edward Walter on (01892) 502320 or ewalter@bussmurton.co.uk.

Edward Walter

Edward Walter