When somebody dies, Inheritance Tax (IHT) is chargeable on the estate that is left behind. As we have written before, this tax has to be paid before probate can be applied for.
There are three occasions where Inheritance Tax can be varied after the initial calculation.
Deed of Variation / Deed of Family Arrangement
Section 142 Inheritance Tax Act 1984
A Will can be rewritten under a Deed of Variation (sometimes known as a Deed of Family Arrangement).
What this means is that one or more beneficiaries of a Will, providing they are over 18, can vary their inheritance and pass it to somebody else.
It may come as something of a surprise, but you can actually vary a Will that did not exist in the first place, if you would have inherited under intestacy.
Any beneficiary, aged over 18, who inherits as a result of intestacy can vary their inheritance in exactly the same way as they can if they had inherited under a Will.
There are various reasons why somebody may not want to accept their inheritance. The two most common are:-
- Varying to ensure a surviving spouse inherits more, thereby reducing Inheritance Tax on the first death.
- Varying because the recipient has their own Inheritance Tax problem, as a result of having a large Estate themselves. By entering into a Deed of Variation, the assets are deemed to be left by the deceased and do not count as a lifetime gift by the person varying their inheritance, so the 7 year rule does not apply.
As an example, we recently dealt with a case where somebody died quite young owning a couple of rented properties.
They did not have a Will, a spouse nor children and so everything was inherited by his elderly parents, who already had a substantial estate, under the rules of intestacy.
By entering into the Deed of Arrangement, the assets were passed directly to the two siblings of the deceased, and mum and dad do not need to live 7 years.
Please note that a Deed of Variation, if being made, has to be prepared and signed within two years of the date of death.
Payments from a Discretionary Trust
Section 144 Inheritance Tax Act 1984
We have written before that a planning idea is to leave everything under your Will to a discretionary trust.
Under such a trust, your trustees (probably the same as your executors) can distribute your assets how they see fit.
They are usually guided by a letter of wishes left by the deceased outlining what they would like to happen.
This is a useful technique if circumstances are uncertain when the Will is written or if you are not sure which assets qualify for reliefs, such as Business Property Relief (BPR) or Agricultural Property Relief (APR).
If the trustees make any distributions within two years of death, they are deemed to be made by the deceased and IHT is re-calculated accordingly.
Use of a discretionary trust can be very powerful; for example, if the trustees pass assets to the deceased’s spouse, this will qualify for the IHT spouse exemption.
Variation by a Court
Section 146 Inheritance Tax Act 1984
Sometimes a Will is challenged, and a Court has to intervene to rewrite the document. If this happens, then the IHT is recalculated based on the Will ordered by the Court. Unlike the two amendments above, there is no two year time limit.
We had to do this recently, when a Will was challenged, and replacement executors were needed.
The Court decided that because of the nature of the assets Chartered Accountants, who were also authorised probate practitioners, should be appointed.
As a result, our two directors became executors of the estate, and we were able to make a claim under this section and receive a substantial IHT refund.
For more information, or to speak to us about our Probate & Estates services, please contact Barry Jefferd or Jenna Boddington on 01480 426500 or go to www.ghprobate.co.uk.
Authored by Director of GH Probate Ltd., Barry Jefferd.
Our Probate service is provided through GH Probate Limited. GH Probate is the trading style of GH Probate Limited. Registered in England and Wales number 9630102. Registered Office: St George’s House, George Street, Huntingdon, Cambridgeshire PE29 3GH.
Authorised to carry out the reserved legal activity of non-contentious probate in England and Wales by the Institute of Chartered Accountants in England & Wales.
