2nd Generation Tax-Planning and the Deed of Variation 

4th May 2007 

The great benefits of utilising a Deed of Variation (DOV) within 2 years of a death to save Inheritance Tax is a topic often discussed.

One ordinarily utilises the Deed of Variation to ensure the use of a nil-rate band upon the first death of a spouse within a marriage.

The DOV can also be very useful in arranging the payment of a specific gift to a done by the beneficiary named under a Will. The great benefit in this scenario is that the amended gift is treated as a gift by the deceased rather than the original beneficiary and as such there is no requirement to wait 7 years to make the gift tax-free.

One use of the Deed of Variation which is certainly becoming more prevalent with experience is the 2nd generation tax-planning DOV.

By way of example, a fairly common scenario, an elderly person in their 80s has died and leaves a net estate of £400,000 after tax. The estate is divided equally between the two children of the deceased in their early 60s who are both homeowners with reasonable pension provisions in place.

Due to house price rises in recent years, both of the children of the deceased already have estates which are
worth substantially in excess of the IHT nil rate band. By virtue of their deceased parent's Will as stated above, they will now receive a further £200,000 into their estates which will potentially add a further £80,000 IHT liability (40% of £200,000) to their own estates.

The IHT solution is the Deed of Variation under which the parent's legacy can be directed away from the beneficiary child and instead placed into a discretionary trust which falls outside the estate of the surviving child. As the child can remain a potential beneficiary of the Trust created they can still benefit from the Trust whilst making sure that the legacy from their parents will not become taxable within their own estates.

As always, a suitably qualified professional adviser should always be employed to ensure that the documentation is correctly drawn up to ensure that you benefit from the potential tax savings.

We are expert Inheritance Tax Solicitors in Bournemouth with solutions to all your Inheritance Tax problems. Simply contact  us today on 01202 802 807.