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29 January 2015

Post-death inheritance tax planning using a deed of variation

Whether a person dies intestate (see Tax News article) or leaves a will, sometimes the way that their estate is distributed can lead to unintended Inheritance Tax consequences.

As mentioned in this month’s Tax News article, if someone dies without leaving a will the first £250,000 of their estate goes to their spouse, with the remainder split between their spouse and their children. Any assets passing to the spouse are covered by the inter-spouse Inheritance Tax exemption and will therefore be free from Inheritance Tax, but the assets passing to the children may trigger Inheritance Tax if they exceed £325,000 (the current nil rate band).

If, however, all assets had been left to the spouse then no Inheritance Tax liability would be triggered at that point, and they could then instead make gifts to the children that would be free of Inheritance Tax providing they live for a further 7 years (a sliding scale applies from year 3 onwards).

Perhaps a more common problem arises if somebody owns a business, as this will usually qualify for Business Property Relief meaning that it can be passed on free of Inheritance Tax. In view of this valuable exemption it is often better to leave the business to your children rather than your spouse, as while passing all assets to your spouse is initially exempt from Inheritance Tax, they could then face an Inheritance Tax bill when they die as the business may no longer qualify for Business Property Relief in their hands.

So what can you do if somebody dies intestate or leaves a will that is inefficient for Inheritance Tax purposes? You can enter into a deed of variation to alter the way in which the deceased’s assets are distributed. You will need a solicitor to draw this up, but providing all beneficiaries agree to the variation, and it is made within 2 years of death it will be valid for Inheritance Tax purposes.

For more advice on this matter please contact me.


Key Facts:

  • If someone dies intestate it can lead to Inheritance Tax consequences
  • Equally some wills may not be drafted in the most tax efficient way
  • Entering into a deed of variation can alter the way that the estate is distributed
  • A deed of variation must be agreed by all beneficiaries and made within 2 years of death


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