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I'm aware of quite a few ways of reducing capital gains tax and know of multiple strategies to reduce your inheritance tax BEFORE you die, however what about after you die and your next of kin have exceeded their inheritance tax threshold? Is there anyway they could avoid being left with a tax bill?
I believed this was impossible, but then recently discovered something called Deed of variation which seems to be just that. You basically have the power to transfer your inheritance to someone else, so you are no longer responsible for the bill.
Has anyone used this before to reduce or eliminate their inheritance tax bill? Interested to see if it is as straightforward as it seems.
Deed of Variation means you can move the inheritance to another party if it has been left to you in a will. This is NOT A INHERITANCE TAX LOOPHOLE. The people you transfer to are still liable for the bill. However there are recognized inheritance tax (IHT) rules on the taxation of lifetime transfers and capital gains tax (CGT) rules. Its not that easy and HMRC would be all over it. I have received monies via deed of variation but I made sure the tax was sorted first.
So for example, lets take this scenario...
A family of 3 (Mum, dad, daughter), where the dad passes away. He had a lot of assets above the threshold so the mother is liable for inheritance tax. The mother then submits a deed of variation to transfer the inheritance to her daughter who is above 18.
Will the daughter then be liable to pay inheritance tax?
No inheritance tax at the point a spouse inherits.
Director of Tax Peplows Limited
CTA ACA FCCA
Of course! Sorry that was a bad example. Let me give you another one.
A single man (let's call him Alex) with a daughter. Alex dies and leaves his daughter his property worth £500k.
After the £325k exemption, she will have to pay 40% of the remaining amount, resulting in a tax bill of £70,000. (40% of (500k - £325k))
The daughter decides she doesn't need the money (or the tax burden). So she decides to submit a deed of variation and elect Alex's sister to become the new beneficiary. Is Alex's sister now responsible for paying the £70k?
If so, does Alex's sister have to pay that £70k, or does it just reduce her inheritance tax allowance when she dies?
Most has been said below but a DOV can be useful for generation skipping.
Say Grandparent dies and leave estate to child. Child doesn't need the money. Child's estate would go to grandchild and (assuming quick succession relief does not apply) the value inherited from Grandparent would be subject to IHT again in child's estate passing to grandchild.
Instead child to do a deed of variation to Grandparent's estate to leave that direct to grandchild thus avoiding the double charge.
Care needed if grandchild is a minor as child is still the settlor for IT and CGT if not for IHT.
Perfect, makes sense now. Thanks for confirming!
All depends upon the will. Spouse to spouse free of tax. I think you have two years after death to execute a D of V. Now moving on the assets to another party under the D of V in your case could well constitute a attempt to circumvent taxes. I am not an expert but why have a D of V when you could transfer assets under the 7 yr rule. D of V's as I said are not a way of getting around the tax laws which ever way you try. Inheritance tax planning is not straight forward and needs professional advice as there are many pitfalls and you could end up with a tax liability. The inland revenue are all over this area. Also when dealing with the estate remember the inland revenue sees the estate value as it has to be declared for probate, which when granted the executors can then deal with things in accordance with the will.
Just in passing, someone died and the estate valued for tax. This person had one very valuable painting running into many thousands. When the paper work was submitted for probate the revenue turned around and said how come the estate pp painting is worth so much. they were told it had been purchased a few years ago. next question was how could the deceased buy such a valuable painting when his tax returns showed very little income. suggestion was he had undeclared income and therefore they started an investigation. Another case where a woman when to court over something and it came to light she owned an very expensive house. As she had no income for years how did she buy the house. The revenue went back years and found she was earning but not the declaring tax. So never try and get round the tax laws it always comes back to bite you on the B--.
It has often been reported that Ed Miliband used this method to reduce his own IHT
The Inheritance Tax is paid by the estate, not by the beneficiaries. So a Deed of Variation won't make any difference either way. Nobody other than a spouse gets anything until the IT has been accounted for.
Also remember that if you give away your home to your children or grandchildren your tax free threshold can increase to £450,000.
Johnta7 did you see my newer example above? (posted about half an hour ago)