The team at Zedra, a global provider of active wealth and fund solutions, use a recent case study to show how Deed of Variation and how it can be used in IHT planning.
A Deed of Variation is a legal mechanism whereby a person who has received an inheritance under a Will can change the intended recipient of the inheritance and divert the gift to another person or a trust instead.
A trust created by a Deed of Variation can be very useful in situations where the person who has received an inheritance under a Will is concerned about it increasing their own estate for Inheritance Tax (IHT) purposes but is unsure if they can afford to gift the funds to, for instance, their own children outright.
We were pleased recently to be able to support a client who found herself in this exact situation.
Our client is a widow in her early 70s with two adult children and three young grandchildren. The client had personal wealth of approximately £1.2m although this was largely due to her home having grown significantly in value.
In 2020, our client found out that she was due to receive an inheritance of £300,000 from an elderly relative under their Will. Although our client was concerned that the inheritance will increase the IHT liability due on her death significantly, she was not entirely comfortable with gifting the funds to her children should she need support with property repairs or care costs in the future.
The ideal solution for the client was to create a Trust using a Deed of Variation and appointing her children, grandchildren and most importantly herself as beneficiaries. This meant that the inheritance was treated as having been left by the relative to the Trust – instead of directly to our client – and it therefore did not increase our client’s own IHT liability. As a beneficiary of the Trust, our client can, subject to her needs, request financial support from the trustees in the future. Otherwise the Trust will be held for the benefit of her children and grandchildren.
It should be noted that, although a very useful and commonly used mechanism, Deeds of Variation must fulfil many legal requirements and be completed within a specified timeframe.