Passing an Inheritance Down a Generation and Avoiding the 7 Year Rule

None of us like to admit that we may be relying upon an inheritance… and with people living longer it is often the case that by the time an inheritance does come your way, your children or younger members of the family could do with it more. But we are all aware that you need to live 7 years to make sure that inheritance tax does not kick in twice.

A Deed of Variation is a legal document that allows the beneficiaries of an estate to change distribution of assets left by someone who has died. Any changes are taken as if stated by the deceased, so they do not affect the tax position of the person giving up their share of the estate, or the person receiving it. It is as if the person had left it to them by their will.

Deeds of Variation can be useful in a number of situations, such as:

• To change the inheritance tax position of the estate, for example by enabling the estate to claim the spousal exemption or charity exemption
• To redirect assets for future inheritance tax planning of a beneficiary
• To provide for someone who was not included in the original Will, such as a grandchild who was born after the Will was made
• To correct any mistakes or oversights in the original Will, such as a beneficiary being left out accidentally
• To clear up any uncertainty in the original Will, such as a gift being incorrectly described
• To provide for someone who was not provided for under the intestacy rules, such as an unmarried partner or stepchild
• To settle or prevent a dispute
• To create a Trust

To benefit from tax advantages, a Deed of Variation must be made within two years of the date of death, must be in writing and signed by all the beneficiaries who are affected by the changes. It must also be submitted to HM Revenue and Customs if it affects the amount of inheritance tax payable.

It's important to note that a Deed of Variation can only be used to redirect assets that would have passed to the beneficiaries under the original Will or intestacy rules. It cannot be used to create new assets or to change any other terms of the Will such as changing the Executors. Further, assets can only be redirected once by a Deed of Variation and the Deed cannot be revoked or reversed after it has been signed.

There are some potential drawbacks to using a Deed of Variation. For example, it may be challenged by other beneficiaries who feel that they have been unfairly disadvantaged by the changes.

Overall, a Deed of Variation can be a useful tool for beneficiaries who want to alter the distribution of assets left by a deceased person. However, it's important to seek professional legal advice before making any changes to ensure that the Deed of Variation is valid and that all tax implications have been considered.

Disclaimers

There is an alternative to a Deed of Variation if a beneficiary simply wishes to reject or give up their inheritance without redirecting it to someone else. A beneficiary has the right to disclaim their gift in the Will or their interest under the rules of intestacy.

A Disclaimer can be in writing, but it does not have to be as a beneficiary can disclaim their gift by their conduct or verbally if the tax advantages are not required. However, if the Disclaimer will change the tax position of the estate it must be in writing and submitted to H M Revenue & Customs.

Beneficiaries may choose to disclaim for a variety of reasons, and they must do so within two years of the date of death of the deceased.

A beneficiary must disclaim the whole gift, they cannot disclaim part of a gift and they cannot disclaim their gift if they have received any benefit from it, unless the Will instructs otherwise. However, if they are left more than one gift, they are able to accept one gift and disclaim another.

It is important to note that a Disclaimer is unconditional. Once a beneficiary has disclaimed their inheritance, they cannot change their mind and claim it at a later date. The inheritance will fall back into the estate and pass to the next person in line, according to the deceased’s Will or the rules of intestacy.

Gifts can be disclaimed more than once, for example, a beneficiary can disclaim their gift and the next person in line can then disclaim it, over and over again.

If you are a beneficiary and are considering disclaiming your inheritance, it is important to act within the required timeframe and ensure that you fully understand the legal and financial implications before making a decision.