Yesterday, Chancellor George Osborne, delivered his sixth budget and possibly the last within his control with the General Election looming. Aside from the headline grabbing issues which were merely interesting at best, it was his comments towards the end of the speech that piqued my interest. The Chancellor quite rightly set out his views on tax avoidance generally and stated to the public that the Government is keen to clamp down on these areas.
He then went on to make specific mention of Deeds of Variation and the need to review this area of law.
“ ...we will conduct a review on the avoidance of inheritance tax through the use of deeds of variation. It will report by the autumn. ...”
This may come as a surprise to some practitioners given that the use of Deeds of Variation have been commonplace for many years, and are sensible tax planning tools. But given their widespread use and their ability to save inheritance tax easily between generations, it is no wonder the Chancellor is keen to review this area and perhaps claw back some more tax for the Government.
A Deed of Variation can be executed by a beneficiary of an estate (regardless of whether there is a Will in place) to redirect their entitlement. It must be completed in writing within two years of the death of the deceased for it to be effective for tax purposes. This can be a fantastic tax planning tool where say, an individual inherits and wants to enjoy their inheritance but does not want that inheritance to be added to their own taxable estate when they eventually die, and tax then has to be paid. It is also a helpful option where a beneficiary simply does not want some or all of their inheritance, but wants to dictate who should inherit in their place. This practice has been a useful tool for many years. It used to be referred to as a 'Deed of Family arrangement', which quite rightly spells out its purpose.
The Chancellor’s comment to review this area by Autumn 2015 may set some alarm bells ringing. The message is very clear, if you have inherited within the past two years seek advice on your options as soon as possible to make use of this opportunity before it disappears.
The Chancellor’s announcement also reminds us of how important it is to have the structure of your Will exactly in line with your intentions for the distribution of your estate, if we are going to lose the option of a Deed of Variation in the future. If a review of your Will is overdue, or for advice on the uses of Deeds of Variation, please contact me.