Deeds of variation
It is not always the case that the provisions of a deceased’s will are the most desirable arrangement from the perspective of the beneficiaries of the estate as a whole. For instance, sometimes particular assets are bequeathed to particular beneficiaries and sometimes the way in which assets are bequeathed could lead to a higher future tax charge. In these circumstances a deed of variation may be useful.
Peter died leaving an estate of £2,425,000 made up of a 50% interest in the family home valued at £825,000, 100% of a privately owned trading company valued at £1m, and cash of £600,000. Peter’s will, which had been drafted many years earlier when his estate was much smaller, specified that the family home and the shares in the trading company should go to his wife together with £100,000 of cash, and the remainder of his estate should be divided between his two children.
If the provisions of the will were followed as specified, Peter’s wife would inherit the house, cash and the shares, worth in total £1,925,000, and the children would inherit the remaining £500,000, less IHT charged of £70,000. Peter’s widow then has a large chargeable estate (£1,925,000 inherited plus £825,000 of her own estate) and worries about her own inheritance tax planning as if she were to die as things stand, inheritance tax of £570,000 would fall due (assuming she held the shares for two years before death). So the total IHT charge for both estates would have been the £70,000 plus the £570,000 i.e. £640,000.
So Peter’s widow and children enter into a deed of variation such that Peter’s widow inherits the property and £275,000 of the cash, and Peter’s children inherit the shares in the family trading company and £325,000 of cash. Through claiming Business Property Relief there is no Inheritance Tax paid on the shares bequeathed to the children and the surviving spouse exemption shelters the transfers to Peter’s widow. The cash transferred to the children is sheltered by the nil rate band.
Peter’s widow subsequently buys back the shares in the family company from the children for £175,000 in cash and £825,000 being the 50% interest in the family home. As the interest in the family home benefitted from the CGT base cost uplift on death, there is no CGT on this transfer.
Two years later, the shares in the family trading company again qualify for business property relief, and so Peter’s widow has a chargeable estate of just £600,000 being the 50% of the family home (£825,000) less the nil rate band of £325,000, plus the unspent cash of £100,000. Were Peter’s widow to die at that time, Inheritance tax of £240,000 would be paid on the £600,000 chargeable estate.
Through the deed of variation the business property relief on the shares in the family trading company is re-cycled, first used by Peter and then by his widow, saving £400,000.
Additional planning points
In order to be effective, the deed of variation must be entered into within two years of the date of death of the deceased whose estate is being varied. The deed of variation must be an instrument in writing and must be approved by all of the beneficiaries of the deceased’s estate. With appropriate planning and execution, a suitably worded deed of variation can also have the effect that the assets transferred through the variation are not subject to CGT on any increase in value since death.