Having your own will to express your post-death wishes is very simple, and avoids many complex issues which can arise from your estate being distributed under the laws of intestacy, the strict legal rules which apply if you do not leave a will. You decide who you would like to appoint as executor to administer your estate, and you decide to whom you would like to leave specific gifts, and who will inherit your residuary estate i.e. everything else.
However, it is possible for a beneficiary of your estate to vary their inheritance, and to pass the inheritance to another individual, such as their children.
This cannot be done on an informal basis, and it is not possible for beneficiaries to make this decision themselves. For an existing beneficiary to give their inheritance to another individual, the following criteria must be met:
- the deed of variation must be drafted and executed as a deed within 2 years of the death if it is to be effective for tax purposes, otherwise it can be completed at any time;
- all affected beneficiaries must agree and sign the deed of variation; and
- the personal representatives must be parties to the deed of variation if the effect is to increase the inheritance tax payable.
For instance, it may be possible for the deceased’s children, who are beneficiaries under the will, to vary their entitlement in favour of their own children. The reason that children may decide to do so is, more often than not, due to their own financial circumstances. If your children earn very high income and are, for instance, additional rate tax payers, the prospect of receiving an inheritance which they will need to factor into their own tax planning may not be too appealing.
Your mother has left her property to you in her will. The property is valued at £600,000. The implication of acquiring this asset in relation to your future income tax, capital gains tax and inheritance tax positions is concerning you. You are considering whether it would be best for the property to pass to your own children instead.
If you are thinking of varying a will to which you are a beneficiary in favour of your own children, there are certain factors which you will need to consider.
- Are your children under 18 and unmarried? This is the most important consideration, as you will potentially remain liable for the income tax liability if your children have not reached their majority.
- Anti-avoidance: these provisions prevent wealthy adult children from passing their inheritance to their own children who may be basic rate tax payers, or may not pay any tax at all. The Revenue considers that anything which constitutes a “settlement” attracts an income tax liability.
- What is a settlement? A settlement is considered to be “any disposition, trust, covenant, agreement, arrangement or transfer of assets”; assets which the settlor retains an interest in, as well as parents who apply for a settlement to benefit their minor unmarried children.
- Disclaimer or variation? In certain circumstances it may be possible to disclaim your interest rather than to vary it. Whilst the rules on to whom your interest would pass are very strict in that case, it may be that the ultimate beneficiaries on a disclaimer mirror the people who you would want to benefit anyway.
- Inheritance tax and capital gains tax: If your children are over the age of 18 and married, deeds of variation must be drafted carefully to include the correct statutory provisions for effective tax planning. You should discuss your requirements carefully with a solicitor to ensure these provisions are included where appropriate.