It emerged last month that Labour party stalwart Tony Benn had taken careful steps to minimise the amount of inheritance tax (IHT) due on his estate when he died. Benn, who died in March this year, made use of what we accountants call a ‘deed of variation’.
When Caroline Benn died in 2000, Benn used a deed of variation to transfer part (worth up to £234,000, the nil-rate band threshold at the time) of their Holland Park home from himself to his children.
Effectively, the will was altered so that the Benn children inherited as much of their mother’s wealth tax-free when she died as possible, instead of that portion passing to her husband. The transfer of ownership allowed Benn to reduce the size of his personal estate so that the amount of IHT payable by his children on his death was minimised. The Benn ancestral home in Essex was also placed in trust, firmly out of the reach of the taxman.
In light of Tony Benn’s IHT strategy, we thought we’d share some information on this often overlooked but useful approach to reducing your IHT bill.
What is a deed of variation?
A deed of variation allows the beneficiaries of a person’s will to change it after they’ve died. This allows you to:
- Reduce the amount of IHT payable on the deceased’s estate
- Make a gift to someone not included in the will
- Change a gift made in the will
- Correct a mistake or ambiguity in the will
- Sever a jointly owned asset or property to prevent it from passing to the joint owner after death
When can you use a deed of variation?
There are several rules that apply when using a deed of variation:
- The deed must be signed within 2 years of the death of the deceased
- Everyone affected by the changes must agree and sign the deed
- The destination of an asset cannot be changed more than once
How can a deed of variation reduce IHT?
You can use a deed of variation to make sure that an estate is passed in a more tax-efficient way that is set out in the will. Let’s use ‘Steven’ as an example:
- Steven has an estate worth £320,000
- Steven is a beneficiary of his father’s will and receives part of his estate worth £100,000
- Steven’s estate is now worth £420,000. When he dies, IHT at 40% will be charged on the £95,000 above the £325,000 nil-rate band
- Steven could use a deed of variation to transfer his £100,000 inheritance to his children so that the value of his estate remains below the nil-rate band threshold
Deeds of variation can also increase capital gains and income tax efficiency.
Get in touch
Thomas Barrie accountants and business advisers can help you with every aspect of estate planning, from drafting your will to choosing a business successor.