There are many reasons why the beneficiaries of a Will (or intestacy) may wish to give away some or all of their inheritance, such as:
- To pass assets down to the next generation
- To remedy a perceived unfairness in the effect of the Will or intestacy
- To settle a potential claim against the estate
- To make a charitable gift in memory of the deceased
Of course, a beneficiary is free to dispose of his inheritance as he wishes. However, making a substantial gift (over and above the annual £3,000 allowance) may result in an increase in the inheritance tax payable on his own death, if he does not survive the gift by 7 years.
But if the variation meets certain formal requirements, the gift can be treated for inheritance tax purposes (and certain Capital Gains Tax (CGT) purposes) as having been made by the deceased. This has many benefits, for example:
- The inheritance tax position of the beneficiary making the gift is unaffected
- If inheritance tax has already been paid on the estate, no further tax is payable when the inheritance is directed elsewhere
- If sums are re-directed to charity (or to the deceased’s spouse) the estate may be able to reclaim some of the inheritance tax already paid
- Where an inheritance is re-directed into trust, the original beneficiary can include himself as a potential beneficiary of the trust without the trust assets being counted as part of his own estate on death, for inheritance tax
In order to qualify for these tax benefits, specific procedures must be followed.
- The variation must be completed within 2 years of the death
- Anyone giving up benefit must sign the variation (but note that a variation which adversely affects the interests of children or unborn beneficiaries will need Court approval)
- The variation must clearly identify the assets to be varied
- If the effect of the Deed is to increase the inheritance tax payable on the estate, the executors must be parties to the variation and HMRC notified of the variation within 6 months
- The variation must contain a statement that the parties intend the variation to be effective for tax purposes (the statement may apply to either Inheritance Tax (IHT) or CGT or to both taxes)
- Assets already varied cannot be varied again
- The original beneficiary must not receive any benefit in return for making the variation
Variations are normally made by Deed but this is not a formal requirement. The variation can be made by letter or other document, provided it contains all the essential elements.
If the variation does not affect the inheritance tax payable on the estate, HMRC need not be sent a copy. However, a copy should be sent to HMRC in the following circumstances:
- When the variation increases the amount of IHT payable on the estate
- When the variation reduces the amount of IHT payable (e.g. where the new beneficiary is the deceased’s spouse or a charity)
- Where the new beneficiary is a charity, HMRC also require evidence that the charity has been notified of the gift