Probate work – planning beyond the Grant

25th September 2019

Our Probate service team has helped many families with applying for Grant of Probate, settling inheritance tax (IHT) liabilities and administering the Estate of a close relative.  Just what you would expect. 

However, as Senior Tax Manager, Dominic Harry, explains, experience gives us an opportunity to discuss with the Executors and inheriting beneficiaries the scope for further Estate planning. 

Whilst there are a number of Estate planning routes available, I want to focus on just two: -

  • Executing a Deed of Variation (DOV), and
  • Lifetime giving shortly after inheriting from a spouse/civil partner

Executing a DOV

Under current legislation, inheriting beneficiaries have two years from the date of, for example, a close relative’s death to decide whether they want their inheritance or whether they would prefer to re-direct it tax-efficiently to, for example, their next generation.  To do this they have to execute a DOV. 

They might do this with their own inheritance tax, income tax and capital gains tax planning in mind.  Although strictly, the beneficiary executing the DOV is making a gift of some or all of their inheritance, the gift is treated for tax purposes as if it had been made by the deceased.  The inheriting beneficiary is deemed to have never inherited the assets and doesn’t therefore need to survive the gift made via the DOV for seven years. 

As I write this, I am talking to a couple of clients about executing a DOV to re-direct their inheritances. 

So, what would they gain from doing so? 

In the first case, the inheriting daughter is wealthy in her own right and inheriting at this time of her life when she believes that she doesn’t need the inheritance is simply adding value to her Estate, which is already liable to inheritance tax at 40%.  She is considering re-directing some of her inheritance to her children or into a family trust for her children, grandchildren etc. 

In the second case, the inheriting elderly mother of a son who died intestate would prefer his Estate to be shared amongst his siblings.  A DOV gives her the opportunity to achieve this and to ensure that what she would otherwise inherit by-passes her Estate (which at her age, is likely to save significant inheritance tax).  This case is also a reminder of how important it is for all of us to have a Will. 

Lifetime giving

A DOV isn’t always the answer and in cases where a surviving spouse / civil partner is inheriting it may be more advisable for them to make gifts themselves of assets they inherit. 

For example, I have a client who has inherited this way and is considering making a gift to their children.  The gift is sufficient in value that if it is made via a DOV it will result in immediate inheritance tax at the rate of 40%.  If the gift is made personally instead, the surviving client only needs to live for three years following the gift to save inheritance tax.

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As with all planning of this type, one needs to look beyond the numbers and consider each set of circumstances on its own merits (there is no “one size fits all” answer).  Indeed, whilst DOVs provide tax planning opportunities, a much safer route would be for the Will to make these directions in the first place (taking away the risk that DOVs may not always enjoy the tax treatment afforded to them at the moment).

There are many wider non-tax issues that also have to be considered and at Bishop Fleming we have the experience to help clients with bespoke estate and wealth planning, focussing on current and future needs and wishes. 

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