This very question was asked by a client earlier this week.
What is a Deed of Variation?
Deeds of Variation are used for several reasons, but crucially to reduce Inheritance Tax (IHT) payable on a deceased’s estate. They can be used to address errors in the drafting of a Will, but their main benefit is to ease the tax burden for IHT. They can be signed at any time in the two years after death, but can only be used once. You cannot sign two Deeds of Variation for the same estate – you only get one bite at the cherry.
Potential changes to IHT under the Labour government have generated a lot of interest, with several key proposals being discussed. Labour has expressed intentions to close tax loopholes and restrict the use of several measures, including offshore trusts for IHT avoidance. This could lead to changes in various relief mechanisms, such as:
1. Agricultural Property Relief (APR)
This relief has been widely used by the farming community to avoid paying IHT on agricultural property. Labour may revise APR to restrict eligibility, which could increase tax burdens for farming families, potentially forcing them to sell parts of their estates to cover IHT liabilities.
2. Business Property Relief (BPR)
This relief applies to those who own business property – subject to strict criteria. It applies to many smaller businesses in particular. There is speculation that Labour could alter or abolish BPR, especially regarding investments in the Alternative Investment Market (AIM), affecting small investors who use AIM shares for tax planning.
3. Deeds of Variation
As outlined above, these documents are commonly used to reduce IHT liability where someone has passed away. Although Labour might consider limiting the flexibility of Deeds of Variation used for estate planning, it’s not seen as a major focus – at the moment. This could change as IHT is widely viewed as one area where the Chancellor may potentially target those using Deeds of Variation to avoid paying IHT. Given the current uncertainty, I recommend that everyone reviews their estate plans in light of the impending budget. Speak to the team at Four Oaks Legal Services you have any queries. Preparing in advance helps to manage any changes in tax liabilities due to reforms that might come in the future. Estate planning is an ongoing exercise which should be conducted on a regular basis and this month’s budget is going to give everyone much food for thought.
Adam Penn T.E.P.