Varying a will after someone has died: what are the rules and how can I do it?

Transcript

The coronavirus pandemic and the fundamental way in which it has changed everyone’s lives so unexpectedly and so quickly means that more people than ever are thinking about their personal circumstances.

This has included families deciding that this is the time to review the division of an inheritance from a deceased relative or friend. There may be several reasons why you might want to look at how an inheritance has been bequeathed:

1. The will may be out of date and not reflect material changes in family circumstances or assets
2. There may be no will at all
3. For tax reasons

If you, and others, have inherited assets from someone who has died, any of these circumstances might prompt you to choose to vary the terms of the will. If you are a beneficiary under an intestacy – in other words where there was no will – you can also change the way the intestacy provisions work. Although the intestacy provisions changed in February 2020 (and the latest changes are described on our website), the intestacy rules governing the distribution of an estate to the closest living relatives have not altered. These rules can have unforeseen consequences, particularly if the deceased person had a partner but was neither married nor in a civil partnership.

Unsurprisingly, there are some rules that would need to be followed in order for a variation of a will or intestacy to be valid:

1. The variation must take place by deed and must be signed by the relevant individuals. The document is known either as a deed of variation or a deed of family arrangement.
   
   
2. A beneficiary may enter into a variation without informing other beneficiaries or the executors. However, if further tax becomes payable as a result of the variation then the executors must be involved as they need information about the variation because they are liable to report any taxable increase to HMRC.
   
   
3. A variation must be executed within two years of the date of the death. This time limit cannot be extended.
   
   
4. A variation can apply to some or all of the inherited assets. A beneficiary does not need to give up all the assets that they are inheriting.
   
   
5. A beneficiary can choose to divide the assets between one or more other new beneficiaries.
   
   
6. Once an asset has been varied then it cannot be varied again tax effectively (see 12 below). More than one deed of variation can be made in an estate but only over different assets.
   
   
7. Variations can also be made after the original beneficiary has received assets whether transferred into their name or by cash into their bank account. They will need to transfer the assets to the new beneficiary though.
   
   
8. An individual can vary a will so that their share is transferred into a trust (usually a discretionary trust) which is also created by the deed of variation. Interestingly, the original beneficiary can continue to benefit from the trust by having access to income or capital. These trusts can be tax efficient and are often set up to help other family members.
   
   
9. The discretionary trust is one where trustees (and these may be family members including the original beneficiary) have control over assets for the benefit of themselves or other people. A discretionary trust has a number of beneficiaries, none of whom are entitled to receive a specific amount of income or capital, but the trustees can decide which of the beneficiaries receives what assets, and when.
   
   The value of the trust is not usually added to the taxable estate of any of the individual beneficiaries. This is particularly beneficial where elderly, unwell or otherwise vulnerable relatives need to have some financial support but do not wish to pay extra inheritance tax if they have a limited life expectancy. This trust allows for them to be supported financially as and when they need it during their lifetimes.
   
   A discretionary trust also creates longer term tax planning opportunities for future generations. It can protect assets from divorce, business failure or other debt issues if created and used properly. However, this does not guarantee protection in all circumstances and our private client team can advise accordingly.
   
   
10. All assets can be varied whether personal, business or an interest in a partnership. The asset must pass under a will or an intestacy. It must not pass under the rules of the partnership itself.
    
    
11. Jointly owned assets can also be affected by a deed of variation. There are two ways in which people generally hold joint assets. The first is the way in which most couples own their own home as joint tenants. This means that both own 100% of the house meaning that their part ownership does not pass under their will. It passes automatically to the co-owner. The second way in which people can own an asset jointly is as tenants in common This means that each person owns a 50% share which they can bequeath, via their will, to anyone they choose, which may not necessarily be the other co-owner. This is typically found in ownership of houses between siblings, sometimes between unmarried partners or sometimes between different generations of the same family. It is key to understand the precise joint ownership of any asset which is jointly owned. A joint tenancy can be severed and made into a tenancy of common by a deed of variation. There are many instances where this is very valuable to a family. For example, if a couple originally owned a house as joint tenants it may be that, over the passage of time, it becomes no longer appropriate for the co-owner to inherit the whole house on the death of the other.  This can be the case, for instanced if the couple has separated but not yet divorced. If people are divorced this is likely to have been discussed during the divorce proceedings.
    
    
12. With regard to tax planning, an election can be made in the deed of variation document for the beneficiary, and possibly the executors (if needed), to elect that the deed of variation shall be treated for inheritance tax and capital gains tax purposes as if all the provisions in the deed of variation had been in the will or the intestacy itself.
    
    It is possible to make that election for either inheritance tax or capital gains tax: there is no requirement that both taxes are covered by the election. Currently, many assets, particularly Stock Exchange investments are worth significantly less than they were even two or three weeks ago - and the stock markets remain very volatile – but investments will go up and down in value.
    
    Property values are also likely to be affected. When someone dies the value of their assets is taken into account at the date of death for tax purposes. By the time the estate is administered those assets may have either gone up or down in value and a variation needs to take into account whether or not the actual value of the asset at either the date of death or the date of the variation is the most beneficial to report to HMRC.
    
    This is not tax evasion or tax avoidance, it is merely the sensible use of the current tax legislation. This legislation has been in place for decades.
    
    
13. The residential nil rate band is another inheritance tax benefit that can be utilised by a deed of variation. Again, please see our website for details on this. However, in general this is an additional inheritance tax relief which can be claimed in certain circumstances. Again, as you might expect, there are rules to follow but it is a useful relief on a main residential property if it passes to certain family members including children.
    
    This is in addition to the ordinary nil rate band relief, which is currently £325,000. The residential nil rate band has only been available since 2017 so older wills are not likely to have been drafted to take advantage of it.
    
    For deaths after 6 April 2020, the amount of the relief should be £175,000. It is also possible, should all the rules be followed, for a transferable residential nil rate band to be claimed if the person who has died was predeceased by their spouse.
    
    In this way on the death of the second of a married couple, up to £1million worth of assets might be excluded from the inheritance tax calculation because they are eligible for tax relief.
    
    
14. If, under the original will, reasonably significant gifts were made to charities but not enough to qualify for the lower rate of inheritance tax (36%), a variation can be undertaken (providing 10% of the estate was gifted to charity) to increase the amount given in order to take advantage of the 36% rate (the normal inheritance tax rate is 40% on assets passing to individuals who are neither spouses nor charities). Some business or farming assets are also eligible for inheritance tax relief.
    
    
15. If someone has inherited assets from the estate of another individual but then subsequently dies themselves within that two year period (as mentioned at the beginning of this podcast) then the executors of the second individual to die may vary the inheritance that they received from the individual who died first and direct it, potentially, to the same people who would inherit under the second estate, perhaps through a trust, but it would be treated as if it came from the first estate for tax purposes.
    
    This can create significant tax savings. Although there is another inheritance tax relief, known as quick succession relief, which can also apply in circumstances where two individuals die shortly after each other, advice should be taken as to which tax relief is the most beneficial to the family.
    
    
16. Overall, what these rules and opportunities mean is that there are further options available to families to protect assets - and the family members themselves, particularly if some of those family members are vulnerable. It also means that business assets can be passed to the individuals in the family who are actually running that business, or are involved in that farm, and not divided in a way that will harm the business and possibly compromising the future financial security of the whole family. Again, in these uncertain times it is something that families really do need to consider even at such as difficult time when someone has died.