As we await the new Chancellor’s first Autumn Statement, it might be worth taking note of a comment slipped into his predecessor’s last one. To quote from the Blue Book:
“Following the review announced at March Budget 2015, the government will not introduce new restrictions on how deeds of variation can be used for tax purposes but will continue to monitor their use.”
This can be translated as: – they are acceptable for now but might not be forever.
But what is a deed of variation and what can be done with it?
Put simply, the main use is to enable the beneficiaries of a will to agree to alter the terms of that will after the death of the testator. The amended distribution of the estate must be done within two years and is treated as having been made by the deceased. All affected beneficiaries have to agree so it might not be so easy if any are minors (in which case court approval is needed) or if there is discord within the family, but otherwise a variation is relatively straightforward
There does not actually have to be a will. It is equally possible to vary what would otherwise happen under the intestacy rules (which apply where there is no valid will) or to change what happens to a share of a property owned as joint tenants, which would otherwise pass to the surviving joint owners(s) regardless of the intestacy laws or will.
Variations are often to amend the distributions set by wills that are some years old. Although most solicitors would say wills should be reviewed at least every five years, in reality many people fail to do so, and family circumstances may have changed in all sorts of ways.
There is no doubt that there can also be tax advantages, but often this will be a case of avoiding unintended tax consequences or taking advantage of a tax relief that may not have existed when the will was written. It seems unfair to tar such arrangements with the “unacceptable aggressive tax planning” brush.
For example, Mr M dies and his estate is £1 million. He leaves half to his wife and half to his sons, Ed and David, not realising that this creates an Inheritance Tax bill of £70,000. Ed and David, being independently wealthy, agree to sign a deed of variation redirecting their £500,000 into a life interest trust for the benefit of Mrs M. This enables the entire estate to benefit from the IHT exemption for assets left to a husband or wife and saves £70,000.
Or consider this. Since 6 April 2012 a reduced rate of IHT (36% rather than 40%) has applied where 10% or more of the estate is left to charity. There may well be families who might wish to take advantage of this but the testator has left no such provision in the will. Provided that all affected beneficiaries agree, they can enter into a deed of variation to make a tax-efficient charitable donation, something governments have sought to encourage in recent years.
Continuing with unrestricted deeds of variation is an important “relief valve” to counteract the fact that when wills are drafted it is unlikely the precise wishes and circumstances of either the testator or the remaining family at the date of death will be known. Hopefully this is one policy of his predecessor Mr Hammond will decide not to change.