Deeds of Variation – a taxing issue

A quick glance at the daily newspapers and tuning in to radio call-ins and it is clear that the upcoming events in May are grabbing the media's attention. People are expressing their opinions as to who they think will win and who the big losers will be; how money could be better spent and whether current leaders should be replaced come the end of May. With not only the Premier League looking like it will culminate in another epic battle, but the FA Cup Final also taking place (which deserves a mention if only for my beloved Reading being within touching distance of gracing the occasion with their presence), May is on a lot of people's minds.

But moving away from issues in the sporting world, there is an even more significant event happening this May – even more important than the ten-strong B P Collins team tackling the London West Tough Mudder event, which is taking place in the name of supporting the mental health charity Mind. Yes, I am of course referring to the general election taking place on May 7, when millions of people will mark their ballot papers to vote for who they want to represent their constituency in Parliament.

In the run up to this, the Chancellor’s annual Budget was announced recently, whereby George Osborne set out the Government's intended spending plans.

Here in the private client practice, I was delegated the task of being on 'Budget Watch' to identify any news which would affect our working practices and the advice that we provide to clients, so that it could be posted on to our various social media channels for clients to be kept informed.

Amongst the introduction of the Personal Savings Allowance (which allows the first £1,000 interest an individual receives from their savings in a tax year to be tax free) and the Help to Buy ISAs for first-time buyers, the issue announced by the Chancellor of the Exchequer which caught our attention was that the use of Deeds of Variation is to be reviewed, and a report to be completed by the Autumn.

Whether this is just a political ploy used to undermine Labour leader Ed Miliband – as he and his brother David were alleged to have used a Deed of Variation with their mother Marion to vary the terms of their father’s will, so as to move ownership of a proportion of the family home into Ed and David's names – or not, will come to light in due course.

Tax avoidance has been a topic which the media have devoted many column inches to over the last few years, no less so than throughout the recent scandal involving HSBC. The announcement in the Budget to review Deeds of Variation may be a technique used by the Government to show the public that they are serious about tackling tax avoidance and that these instruments are one means for the wealthy to avoid tax.

Nevertheless, it should be remembered that these are useful documents which can help families re-distribute an estate so that it is as tax efficient as possible. 

In my first month in the practice group, I was asked to draft a Deed of Variation for an elderly client who was receiving an inheritance from their sibling, but as they had a sizeable estate already, they wanted to vary the sibling's will so that the inheritance was divided equally between their four children instead. This was opposed to the client gifting the money to the children directly; as such gifts are classified as 'Potentially Exempt Transfers' or 'PETs', and are included in an individual's death estate if made less than seven years before death. As inheritance tax was payable on the sibling's estate anyway, the use of the Deed of Variation meant that double taxation was avoided.

There are of course strict requirements that the Deeds of Variation must comply with in order to be held valid. Firstly, they must be created within two years of the death of the relevant person; it must be in writing and be signed by all of the beneficiaries who are wishing to divert their inheritance.

There are a number of situations in which it is useful to consider having a Deed of Variation, including where an individual has been omitted from the deceased's Will, or their inheritance is not seen as adequate based on the value of the deceased's estate.

A Deed of Variation can also be used to reduce the rate of inheritance tax that applies against an estate by varying the Will so as to give 10% of the deceased's net estate to charity, which qualifies the estate for the 36% rate of tax as opposed to the 40% rate. Money going to a charity registered in the EU from a deceased's estate does not attract inheritance tax as they enjoy 'charity exemption'. Of course this will not be beneficial to all estates and therefore professional advice should be taken by the executors and beneficiaries.

If you have any queries regarding Deeds of Variation, or other issues regarding estate administration, or you wish to discuss estate planning measures that you can take in order to minimise the inheritance tax that your estate will incur, then please contact a member of our private client team.

So as May draws ever closer, all preparations and discussions become increasingly more heated and intense, both in and between the political parties ahead of the election, but also for the B P Collins' Tough Mudder team, with team members frantically preparing their training regimes. I know that, for me, my labrador Bertie is starting to lose his patience with my exercise regime infringing on his walks which have been replaced with runs, as he is perennially unable to pace himself and so ends up exhausted after 200 metres. Let's just hope that the political party leaders all pace themselves for the general election better than Bertie does.

Posted by Thomas Bird, trainee in the private client practice group.

Thomas Bird started his training contract with B P Collins in September 2013. He graduated with a first class honours in International Business in 2010 before completing a Masters in Law at the University of Sheffield, attaining a commendation. Thomas worked as a paralegal within the Litigation and Dispute Resolution team for 3 months in 2012 and also gained legal experience at a well-respected firm in Leeds in 2011.