Deed of Variation Advice/Explanation

[emalrola]

My mother died quite suddenly 1 month ago. She was a widow for 20 years prior to that. She has left an estate of approx £360 to be spilt between her 3 children.

My brother (who is the executor) has mentioned that the solictor has advised us that we can use a deed of varition to put money into (I think) dicretionary funds (but I could be wrong about this terminology) for the education of her grandchildren (9 grandchildren) and avoid paying IHT on this.

Can anyone explain to me what this means and whether this is the fact (every article I've read only talks about deeds of variation for surviving spouses, but nothing about children/grandchildren, so please don't quote examples about spouses)

Many thanks for any advice.

[King_Maker]

I assume you meant an Estate of £360,000?

In theory, a Deed of Variation/Family Arrangement is a relatively simple device.

It need have nothing to do with IHT per se. It can be used by beneficaries to re-allocate bequests among themselves, or even to someone not mentioned in the Will. It can be used in Intestacy also.

I assume that your brother's solicitor has "generation skipping" in mind? Rather than the parents gifting asset(s) to their children and being subject, potentially to IHT etc, a DOV could direct the assets direct to the grandchildren via a Discretionary Trust(s).

The reason why it is more often used with spouses is to avoid the potential loss of £110,000 (£275,000 @ 40%) due to the non-utilisation of the Nil Rate band when the entire Estate is left to the surviving spouse (and thus IHT exempt anyway).

[emalrola]

Yes I did mean 360,000! So are you saying that we would still have to pay IHT on anything that was re-allocated? (That is what I thought, but my brother is adamant that we won't)

As I understand it, the deed of variation would mean his children would not have to pay IHT when he & his wife die, but it would not change the immediate IHT liability on my mothers estate. Is this correct?

[King_Maker]

You are correct.

In broad terms, the IHT in respect of your late mother's Estate should be around £39,000. A DOV will not alter this, unless the Estate was left to a Charity etc.

My condolences on the loss of your mother.

[emalrola]

Thank you for a speedy response.

The only thing I can think of is that private schools often have charitable status, so maybe the solictor was suggesting a DOV to pay school fees direct to the school's charitable trust (but I don't know whether this counts as a charity!) thus making this portion IHT-exempt.

[Lambs]

E,

You should check with your solicitor that you don't walk into a problem with Income Tax, by drawing up a Deed of Variation whereby the parents give up their right to assets in favour of their children.

Deeds of Variation are deemed to be 'read' as if in the original Will for the purposes of IHT and CGT, but NOT, as I understand it, for Income Tax.

It therefore follows that the parents could find that they have (for Income Tax purposes at least) settled in favour of their own children, such that any income arising could be assessed on them.

Please make sure that you check this point with your legal adviser.

Regards,

Lambs

[King_Maker]

It's only gifts to charities which are exempt.

[Lambs]

Eh?

[King_Maker]

Lambs,

My last reply was written before yours, but posted afterwards, and refers to emalrola point about school fees.

[Lambs]

K... you sending your contributions in by carrier pigeon?