Re-gifting inheritance using a Deed of Variation to minimise tax

A Deed of Variation can be used to allow beneficiaries named in a will or under the intestacy rules to alter their distributions from an estate. A gift, or even part of a gift, can be redirected by Deed of Variation to another individual, trust or charity, as if it had been left to them by the deceased.

Below are some example scenarios where you may consider using a Deed of Variation.

Gifts not left in accordance with the testator’s wishes

If you’re an executor of an estate and it’s apparent, after death, that a will is out of date or has been drafted in such a way that the gifts are not bequeathed in accordance with the testator’s wishes, you may consider whether it’s possible for the legatees, by agreement together, to rectify the situation by Deed of Variation. 

Redirecting gifts

There may be benefits of redirecting gifts by Deed of Variation, as it could help to avoid an immediate Capital Gains Tax charge and an Inheritance Tax (IHT) charge on the same asset, twice, in a seven-year period. 

Passing on inheritances to someone else  

If you inherit something and intend on giving to someone else, your gift would be a Potentially Exempt Transfer (PET), which means that if you died within seven years of your gift it would be chargeable to IHT in your estate. So, if you receive an inheritance that you would prefer others, such as your children or grandchildren, to get all or part of, you may be able to use a Deed of Variation to redirect your inheritance to them. This could save them from a potential IHT liability if you do not survive a further seven-years.   

Gifts inherited that are superfluous to needs

If you receive a gift under a will or the intestacy rules that you do not need, you should consider passing on that gift to someone else with more immediate needs, in a tax efficient way by Deed of Variation.

Inheriting business assets from a spouse or civil partner 

Inheritances from your spouse or civil partner may be covered by the spousal exemption. If they are, they would be free from IHT, making you an exempt beneficiary. If you inherit qualifying business assets which attract Business Property Relief (BPR) of up to 100%, such as shares listed on the Alternative Investment Market (AIM) or shares in a limited company, and subsequently leave these types of assets to someone else in your will, they may no longer qualify for BPR. Therefore, you may consider using a Deed of Variation to redirect these types of investments to a non-exempt beneficiary, for example, to your children or grandchildren, which will ensure that any relief is not wasted and it may also reduce IHT, possibly to nil.

Charitable gifts 

Sometimes, just a small gift to a charity or an increase of a charitable gift can produce a greater increase in the amount available for distribution to beneficiaries. So, if you’re dealing with an estate that is subject to IHT at 40%, you may consider using a Deed of Variation to redirect 10% of the value of the net estate to a charity. The estate would then be charged to the lower IHT rate of 36%.