The Budget 2015: Sounding the Death Knell for Deeds of Variation?
01 April 2015
Author: Fiona Kirkpatrick
One of the key announcements included in the Chancellor’s recent Budget was a review of the use of Deeds of Variation for tax purposes.
Deeds of Variation, sometimes known as Deeds of Family Arrangement, have for many years been used as a method of posthumous tax planning by operating to vary the terms of a Testator’s will following his or her death (or indeed varying the distribution of the estate under the Intestacy rules if the deceased left no Will).
Although such deeds are not exclusively used for tax planning, section 142 of the Inheritance Tax Act 1984 provides for their use for this purpose. As long as the beneficiaries under the Will are sui juris (that is, they have the requisite legal capacity) and agree to the variation of their entitlement, the variation will be treated for Inheritance Tax (“IHT”) and Capital Gains Tax purposes as if the assets had always been left that way on the death of the deceased, so long as:
- The Deed of Variation is executed within two years of death
- HMRC is notified within six months of the date of the deed if it alters the IHT liability
In essence, if the deceased’s Will was not drafted in the most tax efficient manner, or there was no Will at all, the family can take a second bite at the cherry, by altering the distribution of the estate and mitigating the exposure to capital taxes.
However the announcement in the recent Budget may have signalled an end to this very useful tool. Whilst there are no measures included in the 2015 Finance Bill, a review of the use of such deeds has been promised, with the results of the review to be reported by the Autumn. Whilst the announcement was in some ways unexpected, it does follow a certain degree of bad press surrounding the use of Deeds of Variation by certain high profile politicians in order to minimise IHT liability. However talk of similar proposals can be traced back as far as the 1989 Budget, following which a review was also promised but nothing further materialised at the time.
Of course, Deeds of Variation have never been preferable to a well drafted Will and the use of appropriate professional advice. However if the death knell has indeed been sounded for the use of Deeds of Variation as tax planning tools, it will become increasingly important to take considered advice in relation to potential IHT implications, and to prepare an appropriate Will which should be kept under regular and careful review in the light of any changes to the IHT regime.