There are ways to avoid the taxman even after the person is deceased, with a deed of variation (DOV)...
Any estates that are valued above the threshold of £325,000, are liable for inheritance tax (IHT) at 40% before any remaining funds can then be passed on to beneficiaries. Meaning the Government could end up taking a sizable chunk of the money left behind for any loved ones, should the estate fall into this threshold.
However, there are ways to avoid the taxman even after the person is deceased, with a deed of variation (DOV).
What is a deed of variation?
A DOV is essentially a legal document that gives permission to any beneficiaries of an estate to make amendments to a will, in the name of the deceased, after they’ve died.
There are a number of reasons why this type of legal document may be required, such as when someone has been inadvertently left out of the will, when the will hasn’t been written in a tax-efficient way, or if there isn’t a will that’s been left at all.
Beneficiaries will be able to change the distribution of the estate with this and even reduce the size of a share that a particular beneficiary was due to inherit, in order to redirect it to someone else. Any changes need to be agreed upon by all the potential beneficiaries.
Can this apply without a will?
Is situations where there is no will in place, the estate will fall under the “Rules of Intestacy” and be divided according to the intestacy laws. In these circumstances, any assets will be passed on to the deceased’s next of kin, usually a spouse or other immediate family member.
Even under these circumstances, it will still be possible to make changes to the inheritance. Again, it’s required that all the beneficiaries under the intestacy rules agree with each other as to the distribution of the estate, for any changes to be made. A DOV can still be used to redirect assets to other beneficiaries, who otherwise would have been left with nothing.
How can IHT be reduced?
So, a deed of variation will allow money to be redirected to a number of beneficiaries in order to dilute the amount of IHT that will be owed. It could even allow assets to be passed directly onto a charity, so that the overall IHT owed by the estate is reduced.
For example, if you as a single beneficiary stood to inherit a windfall above the personal allowance of £325k, then you’d be subject to 40% IHT. By using a DOV and altering the deceased’s will, you can change the amount your going to inherit so that some or all of it goes to other beneficiaries instead. This would then either reduce or completely eliminate the amount of IHT that you would have had to pay down the line.
If you wanted to pass any inheritance straight onto your children and then pass away within seven years, then tax would need still need to be paid on the gift. A DOV would allow the inheritance to be passed in full straight to your children, and reduce the IHT liability by skipping a generation.
What are the rules and restrictions?
A deed of variation can be obtained both before and after the Grant of Probate, which is the legal document required for a named Executor in the will to distribute the assets of the deceased.
Even after the deceased’s estate has already been distributed a DOV can still be made, however it must be within two years of the death of the deceased.
Other rules and restrictions include:
All the Executors and beneficiaries of the estate must sign and agree on changes.
All affected beneficiaries must be over 18.
Any beneficiaries who adjust their share of inheritance, will not be compensated for any loss.
A DOV can be applied for by simply writing a formal letter that explains any changes that you wish to make. However, certain conditions need to be met in the letter, HM Revenue and Customs has a checklist on this.
Keep in mind, any variations that affect under 18 year olds or unborn children, will require a court approval before changes can be authorised.
At Get Probate, we know how daunting and stressful dealing with the administration of an Estate can be.