Wentworth Cecil Gurney,
The first method for changing the distribution of an estate is by using a deed of variation: beneficiaries can agree between themselves to change the distribution of an estate by entering into a document called a deed of variation. This tool allows beneficiaries to re-distribute the estate amongst themselves, or to pass on some or all of their inheritance to someone else. By using a deed of variation to redistribute their inheritance to others, a beneficiary avoids the possibility of paying inheritance tax, which they would otherwise need to pay if they were to die within seven years of making the gift. A beneficiary may also want to use a deed of variation to reduce the estate’s inheritance tax bill; for example, by ensuring that the residence nil-rate band applies (an additional tax-free amount that an estate can claim if a deceased person’s home is inherited by direct descendants). The beneficiaries may also wish to use a deed of variation to bring an end to a trust created by the deceased’s will, thus reducing the complexities and costs of dealing with an ongoing trust. It is important to note that any inheritance tax benefits can only be obtained if the variation takes place within two years of the testator’s death.
Another method of changing the distribution of an estate involves a person who receives a gift in a will of personal property (i.e. property other than land) complying with a request made by the testator (the person who wrote the will) regarding the distribution of the gift. The person who received the gift needs to comply with the request within two years of the testator’s death. If they do comply within that time frame, then, for inheritance tax purposes, the distribution will be treated as if it were included in the deceased’s will rather than being taxed as a gift from the original recipient of the legacy to the new recipient. This tax treatment can be beneficial to the original recipient. However, it can also be detrimental, and specialist advice is needed to determine this.
The final method of changing the distribution of an estate is the distribution of property from a trust created by a testator’s will, or the rearrangement of a trust created by a will, within two years of the testator’s death. One reason for doing this is to ensure the estate benefits from the residence nil-rate band. In order to claim the residence nil-rate band, the deceased’s home needs to be inherited by direct descendants. If testators create certain types of trust, they will not meet this requirement. Therefore, they will lose out on the possibility of increasing the amount of their estate they can pass free of inheritance tax. By distributing property from such a trust to direct descendants, one can ensure the estate does benefit from the additional nil-rate allowance. A second reason to do this is to secure tax savings by changing from one type of trust to another; for example, by changing the type of trust from a discretionary trust (a trust under which the trustees decide which beneficiaries to benefit and the extent to which they benefit) to a trust under which the deceased person’s spouse benefits from the trust property for life before it passes on their death to someone else. Discretionary trusts are subject to an onerous inheritance tax regime whereby the trust assets are taxed when they enter the trust, every 10 years (if they are still in the trust), and when they leave the trust, whereas, if one leaves assets in trust for a spouse to benefit from during their life, there is no inheritance tax charge on the first spouse’s death.
Shortlands Law Firm offer expert advice and assistance in respect of varying the distribution of deceased person’s estates, including the possible inheritance tax benefits. Please contact us on +44 (0)207 629 9905 or email firstname.lastname@example.org if you would like more advice about this complex area of law.
The contents of the above article is a broad overview, and should not be relied upon without obtaining specialist advice that is specific to your circumstances. Shortlands Law Firm accepts no liability resulting from your reliance on this article.