Why not pay less tax, for a change?
That old chestnut warns us that the only things that can’t be avoided in life are death and taxes. While this may be true, we can certainly avoid death and tax occurring at the same time. Well, a bit.
There are two main problems with inheritance tax- firstly, it is considered by politicians to be a voluntary tax- after all, so long as you dispose of all your assets more than seven years prior to death, there will be no IHT to pay. Secondly, the most effective IHT tax planning can only be done with the aid of a crystal ball to inform you of the exact future date of your impending demise.
However, there is a neat and nifty Will planning trick, that could reduce a future IHT bill, and even wipe a current IHT bill. Strictly speaking, it isn’t even planning, as you do it after the main event. Well OK, the deceased clearly doesn’t do it, but his or her relatives might.
The ‘trick’ in question is a legal document called a “Deed of Variation”, and quite simply it allows you to vary, or change, the terms of someone’s Will. Now, before you get too excited, thinking about Aunt Bertha who left all her cash to your sister instead of you, this is not a means to swipe other people’s inheritance, all of the beneficiaries under the Will must agree to the variation. This means you are unlikely to get agreement for you to benefit at the expense of someone else.
But it can be used quite effectively in IHT planning. Say your elderly grandmother dies and leaves your mother £100,000. If her Estate is large enough, your mother may suffer 40% tax on that amount, leaving £60,000. Of course, your own mother doesn’t need the money and you inherit it on her death. Again, depending on the size of your mother’s Estate, you could end up paying 40% tax on the £60,000, leaving you with only 36% of the original sum.
What you could do, is vary your grandmother’s Will so that you get the £100,000, not your mother. This way you would skip the double IHT charge and save £24,000 tax. Nifty huh.
Another way a deed of variation could be used is to remove a current IHT bill. If someone dies leaving all their money to their children, any excess over the nil rate band will be chargeable at 40%. However, gifts to spouses are exempt from IHT so the Will could be varied so that any balance goes to the spouse instead of the children, zapping the tax bill in one fell swoop. The spouse could then gift the extra cash to the children, or undertake more complex planning, and if she survives seven years, the children have had the cash tax free. Job’s a good’un.
Remember though, a Deed of Variation can only be made if there is a Will in place- you can’t amend what isn’t there. Also, if the Will leaves money to charity, it will be difficult to get approval for a variation, and downright impossible to alter the charity’s share of a Will.
And before you go off digging up your deceased relatives*, the variation must be drawn up within two years of death.
*not literally. That would be gross.