Avoid Inheritance Tax With A Deed of Variation

If you are the beneficiary of an estate, you may find yourself falling prey to a hefty inheritance tax bill. There are various ways to slash these costs, one of which is by drawing up a ‘Deed of Variation.’ Prestige Tax and Trust Services explains how to avoid inheritance tax with a deed of variation.

Paying inheritance tax

As a beneficiary of an estate, you may not be entitled to receive all of your inheritance. Should the value of the deceased’s estate eclipse a certain amount (£325,000) at present, then said estate will be required to pay a 40% inheritance tax on anything above this threshold, leaving less for you to inherit. It is useful, therefore, to find ways to avoid inheritance tax to maximise what you take away.

There are various ways, from leveraging trusts to giving ‘gifts,’ for the person whom the estate belongs to, to slash the inheritance tax bill. We recently revealed, for example, that they can strategically use Individual Savings Accounts – passing these vehicles’ tax-free allowances to their spouses to cut the value of the estate, and protect your inheritance. But is there anything you can do as a beneficiary?

Varying your inheritance

Why yes there is – you can draw up a Deed of Variation. As a BT article explains, a Deed of Variation is a document which you can use to redirect the deceased’s assets which you inherited to someone else – perhaps your spouse or children. As long as you secure the agreement of all the deceased’s beneficiaries beforehand, you can use this tool to give all or part of your inheritance to someone else.

For the sake of clarification, a Deed of Variation is not the same thing as a ‘variation.’ The latter term refers to a legal tool which can be employed to change a will after someone has died. You may need to use a variation, for instance, to clear up any uncertainty in a will. But this is often a lengthy, complex process – as it can result in court proceedings, and it is not an effective way to reduce inheritance tax.

Protecting your inheritance

So why is a Deed of Variation more effective at shielding your inheritance, than a variation? With this document, you can alter the distribution of assets in the deceased’s estate, allowing said estate to take advantage of existing inheritance tax exemptions for certain assets and beneficiaries as much as possible. This will reduce the taxable value of the estate, leaving more for beneficiaries to inherit.

As an example, let’s say you use a Deed of Variation to pass some or all of your inheritance to your spouse or civil partner. These people would be liable to pay inheritance tax if they were handed the assets by the deceased, but since they were given them by you, as your spouse or civil partner they are exempt under UK law. Keep in mind that you must make a Deed of Variation within two years of the deceased’s passing, it must be in writing and it must be signed by all the estate’s beneficiaries.

Prestige Tax and Trust Services

If you compile a well-written Deed of Variation, therefore, you can use it to really maximise your inheritance. It is wise to come to experts to ensure you draw up an effective Deed of Variation, as UK inheritance law is complex, so this task is best completed by someone who knows their stuff. Prestige Tax and Trust Services can lend a hand here, helping you avoid inheritance tax on a loved one’s estate.

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Do ISAs Avoid Inheritance Tax?

If you want to ensure that your estate pays as little inheritance tax as possible, so you can provide for your loved ones when you are no longer here, there are various tools you can use. Looking at one measure in particular, Prestige Tax and Trust Services asks: do ISAs avoid inheritance tax?

Avoiding inheritance tax

It is a sad fact that life is unpredictable. One day, you may have an accident or fall ill and if this day ever comes, you will want to ensure that your loved ones are provided for financially. This is why inheritance tax can be an issue. If the value of your estate passes a certain point (currently £325,000), it has to pay a 40% inheritance tax on the remaining assets, leaving less cash for your loved ones.

Lucky for you, there are various ways to minimise or outright bypass inheritance tax. One way to do so, for example, is to use trusts to void inheritance tax. If you set up a trust, you no longer legally own the assets held in this vehicle – the trustee, who manages it, does. So these assets do not count towards the value of your estate, making it less likely to eclipse the threshold. But there are other options too.

Introducing you to ISAs

One such tool that you may want to think of taking advantage of here is the Individual Savings Account (ISA). This is a financial product, where you can hold cash, shares etc., without paying tax on the interest, capital gains or dividends. You can use an ISA, therefore, to bump up your savings while you are alive, so when you are no longer here, there is more money available for your loved ones.

These products come in so many shapes and forms – from the popular ‘cash ISA,’ which is a standard savings vehicle, to the lifetime ISA, which is better for long-term saving. Each has its own rules – for example they have different annual savings caps, so it’s critical that you do your due diligence, allowing you to find the right product. Also, while most ISAs are covered by the Financial Services Compensation Scheme – meaning that you can clam back up to £85,000 if the bank goes bust, some are not.

Discussing ISAs and inheritance

So do ISAs avoid inheritance tax? It is a bit complicated. The Telegraph explains that ISAs are included in your estate for inheritance tax purposes. However, you can use what is known as an “additional permitted subscription” (APS) allowance, to pass your ISA onto your spouse or civil partner – retaining their tax-free benefits, when you die, helping you shield your estate from inheritance tax.

If you include an ISA in your estate you can leverage the APS to ensure it raises the value of your estate as little as possible – reducing the likelihood of it owing inheritance tax. You must, however, write a will and state clearly in this document that your ISA should go to your spouse or civil partner. Keep in mind that there are certain criteria for the APS allowance. Your spouse/civil partner must be aged 16 or over and you have to have an ISA in the UK and died on or after 3rd December 2014, to be eligible.

Prestige Tax and Trust Services 

It is really key, therefore, that you write an effective will, if you wish for your ISAs to be used to help your estate avoid inheritance tax. As experts on this subject, we can help. The Prestige Tax and Trust Services team can write the will you need to ensure that your loved ones are always taken care of.

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