You probably feel that it might be a pleasure to receive an inheritance following a person’s death – after all, a will is a person’s last chance to leave you a gift. But you might not want to receive the inheritance.
There are two main reasons for this:
• The gift is unwelcome – you for example never liked that picture that belonged to Aunt Anastasia, and you know your brother would like it instead.
• If the gift you receive means that on your own death extra Inheritance Tax would be payable – you may not want to make that Inheritance Tax bill any larger.
If you receive a cash legacy and then in your own time make another gift yourself of the item (or cash sum), there is no problem at all. However, if you receive an asset and then make another gift of that asset some time later, that second gift could trigger an immediate Capital Gains Tax charge, (there is no capital gains tax on pounds sterling in themselves, as they do not gain in value). In both cases, if you receive the item yourself, you would need to survive the gift by seven years in order for your own estate to be treated for Inheritance Tax as decreased by that sum, if the gift is larger than £3,000.
If you make a gift under a Deed of Variation, you can structure your affairs to take advantage of the tax legislation. The gift may be treated (for Inheritance Tax purposes) as if you hadn’t made it, but Aunt Anastasia had. This means you don’t need to worry about whether you will go on to live for a further seven years because the asset never became yours in the first place, for inheritance tax legislation purposes. If you make a straightforward gift using a Deed of Variation, you would not pay a Capital Gains Tax bill if the asset has increased in value from the time of death until the time you dispose of it – the recipient acquires it at the probate value.
Although a Deed of Variation saves tax, it is still a gift, and should not be made for the purposes of avoiding paying nursing home fees.
If you are not sure whether you might need the money again, or your children are too young, a trust mechanism might be the way forward. A trust is a legal structure where trustees look after assets for the benefit of a defined set of people. A gift varied into a trust means that the trustees own the money on behalf of a group of people – if the children are young, this can allow for future investment on their behalf.
It is possible, using a deed of variation, for you to create a trust from which you could benefit, without losing the benefit of the Inheritance Tax advantage of that gift not forming part of your estate. This could enable the trustees to give you money from a trust fund. If you think that this approach might suit you, this is something that you need to discuss with your tax and legal advisers, as indeed should any proposal to effect a Deed of Variation: the law is strict and care has to be exercised. The strict time limits of two years from the date of death need also to be taken into account when preparing this document: it is best completed earlier than right at the end of this time period.
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