Tax & Accounting News

Using a Deed of Variation

29/10/2009

Changes to the rules on Inheritance Tax (IHT) have made the benefits of using a Deed of Variation (DoV) for tax planning purposes less clear-cut.

A DoV is a legal document which can rearrange the terms of a person’s will, provided it is signed by all the beneficiaries within two years of the person’s death. The most common reason for using a DoV is to divert all or part of a spouse’s estate to other beneficiaries, so as not to lose the IHT nil-rate band (NRB) – but from October 2007 any unused NRB when one spouse dies can be transferred to the other, for use on their death.

This may appear to make DoVs less useful, but it may be that the transferred NRB is not enough to cover the combined estate on the second spouse’s death if, for example, the estate has risen in value during the intervening years. In that situation, a DoV could still be used to vary the terms of the second spouse’s will so a proportion equivalent to the NRB goes to another beneficiary, for example the couple’s children.

If the surviving spouse can reasonably be expected to live more than another seven years, it makes sense to allow the estate to pass to them on the first death, after which they can then consider making a gift to some other beneficiaries, which will be exempt from IHT calculations provided the second spouse survives for seven years after the gift is made.

For more information or advice please contact us.