Questions about using a deed of variation to redirect my share of an inheritance to a charity

CalvinHobs

My partner died earlier this year. We were not married and owned our house (outright) as joint tenants. I am named as executor of her will and an also named as a beneficiary of her residual estate - a share of 10%. The net value of her estate is well over the nil rate threshold of £325,000 so there will be inheritance tax to pay.

I am considering using a deed of variation to redirect my share to a registered charity which was of special significance to her. For ease of calculation, let's say the value of her residual estate is £120,000. So, my share of this would be worth £12,000 - if I was to accept it.

If I understand it correctly, redirecting my share to the charity using a deed of variation would mean that it could be paid to them free of inheritance tax. This means the charity would receive £20,000 and the inheritance tax bill on the estate would be reduced by £8,000.

I am aware of the rule whereby - if 10% or more of the net estate is donated to charity - then the inheritance tax rate on the estate is reduced to 36%. However, this definitely does not apply in this case. I am also aware that the deed of variation must be made within two years of the date of death.

How to use a deed of variation to change someone's will after death | The Gazette

I have two questions:

Q1. The IOV2 checklist says:

8. If the deceased died on or after 6 April 2012, is 
    the variation seeking to pass assets to charity?
    If the answer to any of questions 6-9 is Yes, the
    variation may not be effective for tax purposes.

As long as the the deed of variation is worded correctly, why might it "not be effective for tax purposes" ? 

Q2.  Would it be better to make the deed of variation before paying the inheritance tax to HMRC? I mean, if the deed of variation is made later on, then someone would need to claim back the appropriate amount of IHT from HMRC - £8,000 in this case. Would the charity claim this back - or would I have to claim it on their behalf and forward it to them?

Btw, I know I will be advised to use a solicitor to draw up a deed of variation. However, it seems they charge over £1,000 to do this. The deed of variation in question would only affect my share so should be fairly straightforward. I would prefer to draw it up myself using a template I found online,  then perhaps pay a solicitor to check it for me.

Marcon

CalvinHobs said:

My partner died earlier this year. We were not married and owned our house (outright) as joint tenants. I am named as executor of her will and an also named as a beneficiary of her residual estate - a share of 10%. The net value of her estate is well over the nil rate threshold of £325,000 so there will be inheritance tax to pay.

I am considering using a deed of variation to redirect my share to a registered charity which was of special significance to her. For ease of calculation, let's say the value of her residual estate is £120,000. So, my share of this would be worth £12,000 - if I was to accept it.

If I understand it correctly, redirecting my share to the charity using a deed of variation would mean that it could be paid to them free of inheritance tax. This means the charity would receive £20,000 and the inheritance tax bill on the estate would be reduced by £8,000.

I am aware of the rule whereby - if 10% or more of the net estate is donated to charity - then the inheritance tax rate on the estate is reduced to 36%. However, this definitely does not apply in this case. I am also aware that the deed of variation must be made within two years of the date of death.

How to use a deed of variation to change someone's will after death | The Gazette

I have two questions:

Q1. The IOV2 checklist says:

8. If the deceased died on or after 6 April 2012, is 
    the variation seeking to pass assets to charity?
    If the answer to any of questions 6-9 is Yes, the
    variation may not be effective for tax purposes.

As long as the the deed of variation is worded correctly, why might it "not be effective for tax purposes" ? 

Q2.  Would it be better to make the deed of variation before paying the inheritance tax to HMRC? I mean, if the deed of variation is made later on, then someone would need to claim back the appropriate amount of IHT from HMRC - £8,000 in this case. Would the charity claim this back - or would I have to claim it on their behalf and forward it to them?

Btw, I know I will be advised to use a solicitor to draw up a deed of variation. However, it seems they charge over £1,000 to do this. The deed of variation in question would only affect my share so should be fairly straightforward. I would prefer to draw it up myself using a template I found online,  then perhaps pay a solicitor to check it for me.

A solicitor is likely to charge the same whether they draw up the deed, or 'review' yours. The latter can actually be more expensive, since it often involves explaining to the client why starting from scratch is the better bet. Online templates are free for a reason - ie they often don't fit the bill. They will also be able to answer any questions and explain any alternatives which might be more tax effective.

That said, a much simpler alternative might be for you to accept the bequest and then donate it direct to the charity using Gift Aid, assuming you are a UK taxpayer? If for some reason that doesn't work, then possibly just contacting the charity, explaining what you want to do and asking them how best to achieve it would be entirely reasonable, unless they are a tiny charity with no access to their own legal resources.

theoretica

Q1. The IOV2 checklist says:

8. If the deceased died on or after 6 April 2012, is 
    the variation seeking to pass assets to charity?
    If the answer to any of questions 6-9 is Yes, the
    variation may not be effective for tax purposes.

As long as the the deed of variation is worded correctly, why might it "not be effective for tax purposes" ? 

Maybe it only means the point in note 8 - If the charity is not told about the variation- ie it is possible for it not to be effective if you miss that step.

Marcon

theoretica said:

Q1. The IOV2 checklist says:

8. If the deceased died on or after 6 April 2012, is 
    the variation seeking to pass assets to charity?
    If the answer to any of questions 6-9 is Yes, the
    variation may not be effective for tax purposes.

As long as the the deed of variation is worded correctly, why might it "not be effective for tax purposes" ? 

Maybe it only means the point in note 8 - If the charity is not told about the variation- ie it is possible for it not to be effective if you miss that step.

Read the notes and that answers the question - it's more than just note 8: https://assets.publishing.service.gov.uk/media/5a7df4d040f0b6230268838d/IOV2.pdf

CalvinHobs

Marcon said:

theoretica said:

Q1. The IOV2 checklist says:

8. If the deceased died on or after 6 April 2012, is 
    the variation seeking to pass assets to charity?
    If the answer to any of questions 6-9 is Yes, the
    variation may not be effective for tax purposes.

As long as the the deed of variation is worded correctly, why might it "not be effective for tax purposes" ? 

Maybe it only means the point in note 8 - If the charity is not told about the variation- ie it is possible for it not to be effective if you miss that step.

Read the notes and that answers the question - it's more than just note 8: https://assets.publishing.service.gov.uk/media/5a7df4d040f0b6230268838d/IOV2.pdf

Thanks - I did read the notes. Clearly, a deed of variation must meet all of the relevant conditions in order for it to be valid. So why include that specific point about "seeking to pass assets to charity"? It would be more accurate to say:

"If the deceased died on or after 6 April 2012, and the variation is seeking to pass assets to charity, then it must meet the relevant conditions in order to be effective for tax purposes."

The only scenario which comes to mind is if the charity was to pass on the gift to a non-charitable recipient. Then IHT on the gift would have to be paid. However, this seems highly unlikely in real life.

CalvinHobs

Marcon said:

CalvinHobs said:

My partner died earlier this year. We were not married and owned our house (outright) as joint tenants. I am named as executor of her will and an also named as a beneficiary of her residual estate - a share of 10%. The net value of her estate is well over the nil rate threshold of £325,000 so there will be inheritance tax to pay.

I am considering using a deed of variation to redirect my share to a registered charity which was of special significance to her. For ease of calculation, let's say the value of her residual estate is £120,000. So, my share of this would be worth £12,000 - if I was to accept it.

If I understand it correctly, redirecting my share to the charity using a deed of variation would mean that it could be paid to them free of inheritance tax. This means the charity would receive £20,000 and the inheritance tax bill on the estate would be reduced by £8,000.

I am aware of the rule whereby - if 10% or more of the net estate is donated to charity - then the inheritance tax rate on the estate is reduced to 36%. However, this definitely does not apply in this case. I am also aware that the deed of variation must be made within two years of the date of death.

How to use a deed of variation to change someone's will after death | The Gazette

I have two questions:

Q1. The IOV2 checklist says:

8. If the deceased died on or after 6 April 2012, is 
    the variation seeking to pass assets to charity?
    If the answer to any of questions 6-9 is Yes, the
    variation may not be effective for tax purposes.

As long as the the deed of variation is worded correctly, why might it "not be effective for tax purposes" ? 

Q2.  Would it be better to make the deed of variation before paying the inheritance tax to HMRC? I mean, if the deed of variation is made later on, then someone would need to claim back the appropriate amount of IHT from HMRC - £8,000 in this case. Would the charity claim this back - or would I have to claim it on their behalf and forward it to them?

Btw, I know I will be advised to use a solicitor to draw up a deed of variation. However, it seems they charge over £1,000 to do this. The deed of variation in question would only affect my share so should be fairly straightforward. I would prefer to draw it up myself using a template I found online,  then perhaps pay a solicitor to check it for me.

A solicitor is likely to charge the same whether they draw up the deed, or 'review' yours. The latter can actually be more expensive, since it often involves explaining to the client why starting from scratch is the better bet. Online templates are free for a reason - ie they often don't fit the bill. They will also be able to answer any questions and explain any alternatives which might be more tax effective.

That said, a much simpler alternative might be for you to accept the bequest and then donate it direct to the charity using Gift Aid, assuming you are a UK taxpayer? If for some reason that doesn't work, then possibly just contacting the charity, explaining what you want to do and asking them how best to achieve it would be entirely reasonable, unless they are a tiny charity with no access to their own legal resources.

Thank-you for your reply. I am reluctant to pay a solicitor for this on principle, as my motive is to maximise the gift to charity. Like I said, only my share of the inheritance will be affected so it seems fairly straightforward.

I am not a UK taxpayer as my income is below the personal income tax allowance, otherwise I would have considered the Gift Aid option. It is a medium size charity so they are likely to have experience of dealing with deeds of variation. I will contact them and see what they say.