• You could accept the inheritance and then give it away, but this might result in a tax liability.
  • You could refuse or ‘disclaim’ the inheritance. If you disclaim an inheritance it remains in the deceased’s estate and is re-distributed. The problem with this is that you have no control over where the asset goes, and it could pass to someone who you would prefer not to receive it.
  • You could change the direction of the gift – this is called a ‘post-death variation’ or ‘deed of variation’.  UK tax laws allow deed of variations to be treated for tax purposes as if the changes to the inheritance had been in place from the deceased’s death.

It may appear to you that the idea of refusing an inheritance doesn’t make a lot of sense, but there are several reasons why a deed of variation could make a lot of sense. People who already own substantial assets often want to re-direct an inheritance to avoid increasing the value of their own estates and so mitigate IHT when they die.

Another reason might be to take advantage of certain reliefs or exemptions such as Business Property Relief (BPR). A deceased business owner leaving business assets to their spouse or civil partner, wastes any BPR because assets passing on death to a spouse or civil partner are tax exempt. A deed of variation re-directing qualifying assets to non-exempt persons avoids BPR being wasted.

To ensure the deed of variation is valid, certain conditions should be met or the tax advantages will be lost.

  • A variation must be in writing.
  • It must be completed within 2 years of the death to qualify for exemption under the inheritance tax (IHT) and capital gains tax rules and must contain a statement that the tax exemption rules are to apply.

Although there are many positive reasons for making a deed of variation, there are also some situations where it could be unwise. For example:

  • A beneficiary receiving state benefits who re-directs an inheritance to someone else could lose their means-tested benefits
  • A person receiving care funded by a local authority who re-directs an inheritance to another person risks falling foul of the ‘deliberate deprivation’ rules
  • If a deal is made that the original beneficiary is to receive something in return for giving up their inheritance the post-death variation will fail to qualify for tax exemption

Making a deed of variation can be very advantageous for some people so it’s worth taking advice.  To seize this opportunity or for further information please contact me on 01332 364436 or s.hilliard@timms-law.com

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