ACCA ATX ^UK Syllabus A3. Inheritance Tax - Deed of variation - Notes ^{7 / 7}

It is possible to change a person’s will after they have died, but why?

• A variation may benefit the estate and its beneficiaries by reducing the IHT on the estate. 

  If the variation increases charitable legacies sufficiently the estate may benefit from the reduced rate of IHT at 36%.

• If an estate is left to children, who have enough property of their own, then the variation can leave property for grandchildren instead of the children, therefore skipping one generation of IHT payable.

How can a will be changed?

1. By court order

2. By a deed of variation

Conditions to be satisfied to be able to execute a deed of variation:

1. The deed must be in writing and signed by all beneficiaries that are affected by the deed.

2. Not be made for any payment.

3. Must be executed within two years of death.

4. State that it is intended to be effective for tax (IHT and/or CGT) purposes.

Illustration

Faisal died on 8 August 2024 leaving his entire estate to his son. 

The estate is valued at £500,000 after deducting exemptions and reliefs including a donation to charity of £18,000. 

No lifetime gifts have been made.

a) What amount of charitable legacy must be made to benefit from the reduced rate of 36%?

b) What is the net increase in the estate if the charitable legacy is increased by executing a deed of variation?

Solution

Net estate after charitable legacy £500,000
Less NRB (£325,000)
Taxable estate (this would be taxed at 40% = £70,000) £175,000

Add charitable legacy £18,000

Total £193,000

10% of total is £19,300

Therefore, the charitable legacy needs to be increased by £1,300 (£19,300 - £18,000) to benefit from the reduced rate of 36%

• Net increase in estate if charitable legacy is increased

  IHT on original estate (£175,000 * 40%) = £70,000
  Cost of extra charitable donation (£1,300)
  IHT on revised estate ((£175,000 - £1,300) * 36%) = (£62,532)

  Net increase in estate as a result of the reduced rate of IHT after increasing charitable payment £6,168

How can a variation of will be beneficial for CGT?

Let's try this with an illustration!

• Illustration

  Jake dies on 01/01/24 and gifts his home to his son John. 

  John intends to give the home to his daughter a few months later.

  How will a variation in Jake's will be beneficial for CGT?

• Solution

  On Jake's death, any gifts made will not be liable to CGT.

  However, when John gifts the house to his daughter - he will be liable to CGT.

  Therefore, Jake should gift the house directly to John's daughter to avoid the payment of CGT!