Inheritance Tax & Variation of Will

Ja7188

I'd like the run the following scenario past the forum and invite any comments...

"Mr and Mrs A have a house worth £700k owned as tenants in common (and on which there is no outstanding mortgage) and saving and investments worth £500k (some of which are in the name of one party, some are in the name of the other party and some are joint) and hence an estate valued at £1.2m.

Mr A dies in 2021 and his will stipulates that his share of all of the above should be left to Mrs A - she therefore now has an estate of £1.2m. There is naturally a desire to pay as little inheritance tax as legitimately possible and therefore within two years of Mr A's death, a deed of variation is agreed which leaves passes £200k of savings and investments to each of Mr and Mrs A's two children. Mrs A is now left with a £700k property and £100k of savings and investments, hence an estate valued at £800k. Mrs A's lifestyle is such that she regards £100k as sufficient to maintain her quality of life.

Mrs A dies six months later and her will stipulates that everything she has is split equally between the two children. She is able to pass on £1m with no liability to inheritance tax, therefore each child receives £50k in savings and investments and a 50% share of the property."

I'd like to get some views (which I obviously appreciate will not constitute legal advice) on the above and whether it is actually legitimate to use a deed of variation in this way, especially given the large sums involved. I would have thought that if it is, the use described above would be commonplace - hence I suspect that this does course of action isn't legitimate.

Any thoughts much appreciated!

Keep_pedalling

Making the deed of variation, will simply mean that £200k of Mr A’s nil rate band have been used up, so when Mrs A dies the combined remaining nil rate bands will be reduced to £800k.

They would appear to be more than comfortably off, so why not simply make use of their annual gift allowances topped up with some larger PET gifts now so that they will fall out off their estate in 7 years. Worth taking out out a second death term insurance to pay any IHT should you both not survive the next 7 years.

kidmugsy

Ja7188 wrote: »

a deed of variation is agreed which leaves passes £200k of savings and investments to each of Mr and Mrs A's two children.

That's one way of ensuring that part of Mr A's estate has to pay IHT immediately (unless the nil rate band has increased by then).

Mr and Mrs A might do better learning about Business Property Relief and Agricultural Property Relief.

Ja7188

So the above course of action is legitimate - however, the net effect appears to be almost exactly the same it would be if Mr A's will stipulated that £200k of savings and investments were to pass to each of the two children with the remaining £100k and the £700k property to pass in full to Mrs A. It actually sounds like the use of the deed of variation actually makes matter worse compared to Mr A leaving everything to Mrs A on the basis that a chunk of IHT would be payable straight away in the former scenario, rather than it sitting in savings/ investments for an additional 6 months where it could earn interest - as it would in the latter scenario.

Is this correct - or have I missed something...?

As I suspected, it sounds like starting to give sums away is the only way in which IHT could be reduced, although with both Mr and Mrs A dying by 2022 (i.e. well within the 7 year period), there would still be some IHT due - unless they were to look into the other forms of relief mentioned above...

Keep_pedalling

Ja7188 wrote: »

So the above course of action is legitimate - however, the net effect appears to be almost exactly the same it would be if Mr A's will stipulated that £200k of savings and investments were to pass to each of the two children with the remaining £100k and the £700k property to pass in full to Mrs A. It actually sounds like the use of the deed of variation actually makes matter worse compared to Mr A leaving everything to Mrs A on the basis that a chunk of IHT would be payable straight away in the former scenario, rather than it sitting in savings/ investments for an additional 6 months where it could earn interest - as it would in the latter scenario.

Is this correct - or have I missed something...?

As I suspected, it sounds like starting to give sums away is the only way in which IHT could be reduced, although with both Mr and Mrs A dying by 2022 (i.e. well within the 7 year period), there would still be some IHT due - unless they were to look into the other forms of relief mentioned above...

How old are these people?

Ja7188

In their 70s - just to be clear, this is largely a hypothetical scenario.

Tom99

Mrs A should gift the £200k but not by way of a DOV and hope she lives 7 yrs that way mantaining the max IHT allowance.

Ja7188

Yep, that's pretty much what I thought as I really didn't think that a DOV could be legitimately used as described above to avoid IHT - if it could, I'm sure everyone would do it...!

Keep_pedalling

Tom99 wrote: »

Mrs A should gift the £200k but not by way of a DOV and hope she lives 7 yrs that way mantaining the max IHT allowance.

But better not to wait until the first dies make the gift now to improve the chances of living 7 years after the gift.