Tax planning using Deeds of Variation

Deeds of Variation allow for tax planning opportunities by effectively rewriting the will for inheritance tax purposes. 

A statement applying s.142 IHTA 1984, allows beneficiaries of a will to transfer assets received to another individual without IHT consequences. 

There is no transfer of value by the person making the variation and IHT is computed on the basis that the will has been rewritten. This means that the tax planning window does not necessarily close at the date of the taxpayer's death. 

The deed must be made within two years of death, it must be in writing and signed by the person, or persons, making the variation. If appropriate elections are to be made, they must be contained within the deed. 

Variations can be made in respect of property passing under the law of intestacy. A variation can also be used to sever a joint tenancy so that the property can be passed under the will. 

A Deed of Variation cannot be made in return for consideration in money or money's worth. If consideration is involved, no election is allowed under s.142. “Consideration” does not include the making of another variation to which s.142 applies. This allows beneficiaries to “swap” assets acquired under a will.

An election is also possible under s.62 TCGA 1992 to deem the transfer of the asset to have been made by the deceased for CGT purposes. This means there is no disposal by the person making the variation and the new beneficiary will acquire the asset at probate value. This cancels any gain in the hands of the person making the variation.

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