7th September 2023

A Tale of Two Deeds of Variations – Part 2

Last time in my previous article, I demonstrated how a variation could be used, whether in an intestacy situation, or, with a pre-existing will, to ensure that the person inheriting had use of the assets for the remainder of their lifetime, but without the inheritance tax implications on their death of those being in their estate by use of an IOU arrangement on a repayment on demand basis.

But what about situations where there is an immediate inheritance tax liability arising out of a Will or out of an intestacy? Can anything be done there?

Often, with a will, it may either no longer be appropriate as at the date of the death, (due to Inheritance tax changes since the date it was drafted. There have been a number of such law changes since 2000); or the value of assets may have changed (usually asset values have increased to a greater extent than was envisaged), so, what may have been sensible for Inheritance tax purposes no longer is.

Take the circumstance where a couple have both been married previously to their current marriage and one, or other, or both, may have children from those previous marriages or relationships.

If the first to die leaves all of their estate to their own children (having severed any joint tenancies et cetera before death) and, let us say, that the joint asset values are around the £2 million mark, then they will, by leaving that person’s assets to their children, give rise to an Inheritance tax bill on the £500,000 in value over and above that deceased person’s own Nil Rate Band allowance and Residential Nil Rate Band allowance, assuming in both cases that those are both fully available.

It also makes the working assumption that the previous marriage of the current deceased ended not on the death of the first spouse of our deceased, but on divorce, so there is no transferable Nil Rate Band allowance or Residential Nil Rate Band allowance from that source.

That means there would be an inheritance tax bill of £200,000 from the arrangements made under the Will.

A variation could alter matters so that instead of leaving the deceased’s entire estate to their children, half was left immediately to them, and the other half was left on a flexible life interest trust basis for the deceased’s surviving spouse, and thereafter the children from the first marriage. That would gain spousal relief on our deceased’s death for Inheritance tax purposes thus saving the immediate £200,000 inheritance tax bill.

With a flexible life interest arrangement in place, that could be ended in favour of an outright appointment to the adult children from the first marriage, two years and a day after the date of our deceased‘s death.

That would act to prevent the HMRC’s Inheritance Tax’s ‘read back’ provisions from being used against the arrangement because it would of course be outside of the two years from date of death that read back has sovereignty over.

It would be a potentially chargeable transfer for the surviving spouse which might have adverse inheritance tax implications, should the surviving spouse not survive a further seven years, from that point, given the tax law in place at present.

But it is an arrangement which does bear looking at, and with any seven-year run out period for Inheritance tax planning, a backstop insurance policy designed to pay the arising inheritance tax bill should thee surviving spouse not survive the seven years should always be looked at.

But what of an intestacy set of circumstances?

There once were three siblings. Only one was married and themselves had a child. They died before the present time, although their now adult son survived. The story is more about the other two brothers’ estates.

Brother A, a bachelor with no children die without a will in place. His house which was jointly owned with his then surviving Brother B on a joint tenancy basis, passed by survivorship to his brother B. All the joint assets such as the joint bank account for household bills et cetera also passed by survivorship to Brother B being the then surviving joint owner. Half of brother A’s sole held assets passed by intestacy to Brother B and half to the nephew from the non- surviving sibling.

Brother B died shortly after and also without a Will in place, also unmarried, with no children. Under intestacy provisions all of his estate was inheritance by the nephew. His estate, swollen as it was by the estate of Brother A, passed solely to the nephew . There was a significant inheritance tax bill associated with it. The nephew wanted to look to see if anything could be done about it.

We were able to put in place a deed of variation for Brother A’s intestate estate. That variation did a number of things which are worth looking at.

  1. Brother B’s entitlement under the intestacy to half of his brother A’s sole held assets was redirected from the date of Brother A’s death to the nephew. The value, therefore, of these assets did not continue to swell the estate of Brother B, leading to an inheritance tax saving of 40p in the pound on every pound redirected from Brother A‘s estate to the nephew, rather than to Brother B.
  2. The variation retrospectively severed the joint ownership to the property and acted to redirect Brother A’s half share to the nephew. That removed half of the value of the house from Brother B’s intestacy on his death.

So, it can be seen that where an inheritance arrives in the recipient’s hands ‘unexpectedly’. whether by the operation of intestacy provisions, or by a Will which is no longer appropriate, when considered for purely Inheritance tax considerations, that much can be achieved with a well considered variation.

The tax implications of that need to be considered well in advance of execution. Variations must be executed within two years of the death. That is a strict time limit and no variation outside of the time limits can be had for any of us.

This is written with the law being as it stands as at 21st August 2023 relating to the availability of the current favourable Inheritance tax treatment that variations have. That may adversely change in the future and it may change with little or no forewarning from the favourable position that we have at present, which allows for variations to cure any taxation or other issue that arise with no Will or an out of date Will being in place.

For an investigation as to whether a Variation may be possible and beneficial for your own circumstances as a recipient under a Will, please contact out Edward Walter on ewalter@bussmurton.co.uk or 01892 502 320.

Edward Walter

Edward Walter