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Deeds of Variation – Inheritance Tax avoidance?

Deeds of Variation allow recipients of wealth on a person’s death to redirect that wealth in an inheritance tax efficient manner.

Deeds of Variation allow recipients of wealth on a person’s death to redirect that wealth in an inheritance tax efficient manner.

The main inheritance tax benefit associated with a Deed of Variation is that wealth can be redirected without the need to survive the gift made through the Deed by a 7 year period. The wealth in question falls out of the person’s estate for inheritance tax purposes immediately.

The Chancellor in his last Budget before the election has announced a review of Deeds of Variation to see if they are being used for inheritance tax avoidance. Suitable anti-avoidance provisions might follow.

This is an alarming announcement. Deeds of Variation are not simply used for inheritance tax planning purposes. More importantly, they allow families after the death of a loved one to redirect wealth and ensure the wishes of the deceased are met.

This might because there was no Will in place (not an uncommon situation) or the circumstances of the deceased had changed and the distribution of their estate under the Will needs to be amended to reflect those circumstances. The inheritance tax benefits, particularly the one outlined above, aids the redistribution process which might otherwise penalise the original recipient of the wealth.

Deeds of Variation are an accepted planning tool that have been used for many years to help families order their affairs in the event of a death.  It would be unfortunate for the assistance they provide to be undermined by some perceived use to avoid paying inheritance tax.

However, in light of this announcement it might be prudent to take advice about a Deed of Variation sooner rather than later.