What if I don’t want my inheritance?
It is a common misconception that following an individual’s death nothing can be done to alter that person’s Will or alter where assets passing under…
It is a common misconception that following an individual’s death nothing can be done to alter that person’s Will or alter where assets passing under the Will ultimately end up. However, it is possible to vary the provisions of a Will to take into consideration the social and financial position of one or more beneficiaries and possibly to carry out post death tax planning.
In most cases, when a person receives an inheritance via a Will or intestacy (i.e. where there is no Will) those assets will necessarily add to and increase the capital value of that beneficiary’s own estate. That beneficiary may not want or need that inheritance and furthermore that inheritance could have both inheritance tax (IHT) and capital gains tax (CGT) implications for the beneficiary further down the line.
So what if you don't want an inheritance? What if you're an executor and a beneficiary doesn't want their inheritance? One option would be for the beneficiary to decide to personally gift that inheritance to other family members which would be treated as either a potentially exempt transfer (PET) or a chargeable lifetime transfer (depending if assets were to pass into trust). This could have negative IHT and CGT consequences.
Alternatively, the beneficiary could execute a deed of variation and redirect all or part of any inheritance he/she receives to another individual or (if relevant) a trust. Section 142 of the Inheritance Tax Act 1984 provides that the terms of the variation will supersede the Will or intestacy provided certain conditions are met.
To be effective, the deed of variation must be executed by each of the relevant beneficiaries whose interests under the terms of the Will (or intestacy) are adversely affected by the variation. It is common for those benefiting under the variation as well as the personal representatives to be a party to the deed (although this is not essential in many cases).
It is fundamental that all those adversely affected by the deed must be a party to the deed. But what if the Will provides for minor or unborn beneficiaries – if there were minor/unborn beneficiaries then it would be impossible for all those adversely affected by the deed to be a party to the document. It would then be necessary for any variation seeking to redirect the interests of a minor to be first approved by the Court under the Variation of Trusts Act 1958 . It must also be shown that the deed is in the interests of the minor or unborn beneficiaries.
Significant tax advantages can be realised by entering into a Deed of Variation. Current IHT and Capital Gains tax (CGT) legislation provides that as long as the deed is completed within two years and contains a valid election, the variation is treated as being contained in the Will itself. This means that the variation is not treated as a PET or a lifetime chargeable transfer by the original beneficiary but is treated as a gift under the Will.
As an example Bill received a pecuniary legacy of £200,000 from his late father Ben. As Bill has a large estate of his own he has sufficient assets and income to meet all of his current and future income and capital requirements. He therefore decides instead to redirect his inheritance to his children to help them purchase properties. By using a Deed of Variation the legislation treats that inheritance as passing directly from Bill’s estate to his grandchildren without additional IHT being payable. The result being that Bill’s taxable estate has been reduced immediately by £200,000. Had Bill instead decided to receive his inheritance and then gifted the £200,000 to his children that sum would not have fallen out of his estate unless he survived the gift by 7 years.
Alternatively, if Bill kept the legacy it would form part of his estate for IHT purposes and would be taxed at 40% on his death. The result being that the £200,000 would have been subject to IHT both following Bill’s death and Ben’s death before ultimately passing to the children.
Finally, Bill may have decided that although he does not need the £200,000 he does not trust his children to manage the inheritance he wants to pass on to them. To maintain a degree of control he could redirect the £200,000 into a trust. Bill would not be regarded as the person establishing the trust for IHT purposes but for CGT and income tax purposes Bill, not Ben, is treated as the settlor. This means that any income and capital gains in the trust will be taxed at Bill’s tax rates. This may be a small price to pay for the control which he desires.
When considering the merits of a deed of variation it is important not to give away more than you will need to maintain your current standard of living. That said, if you are in the fortunate position of not needing those inherited assets a deed of variation if a very useful tool to help minimise tax and to pass assets to the next generation in an appropriate manner.