If you inherit money you can redirect your inheritance, perhaps on to the next generation.

Usually when you do this it is a gift by you. This means you have to survive 7 years for it to leave your own estate for inheritance tax. If you make a gift and die within 7 years then the gift is treated as being in your estate and it is charged to inheritance tax (IHT). So IHT can be charged on an inheritance you did not ever take but which you sent to someone else. You can avoid this by signing a deed of family arrangement or a deed of variation.

What is a deed of variation?

A deed of variation (also known as a deed of family arrangement) is a formal legal document in which you redirect your inheritance. That variation says that the inheritance is not for you but it is for someone else named by you and then that passes directly down to that person.

What are the benefits of a deed of variation?

This creates a leapfrog effect so the inheritance never goes through you. You are treated for IHT as if you never had it and have made no gift and so it is not taxed to IHT on your estate, and the 7 years do not matter.

A deed of family arrangement or a deed of variation can even allow you to have your cake and eat it. Usually if you make a gift and still retain access to the asset given away then it never leaves your estate for IHT. With a deed of family arrangement or a deed of variation you can vary your inheritance to a trust for you and other family members and that trust can benefit you. That trust can give you access to the asset but it is not yours for IHT.

This also allows families to agree among themselves to share the inheritance in a way which better suits, without adverse IHT consequences.

This planning has to be done within 2 years after the death of the person you are inheriting from. There are technical anti-avoidance rules and specific requirements for the wording of the deed to be followed before this planning works for tax- therefore early legal advice is essential.


Leigh Gould