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Osborne could close door on will changes after death

Chancellor George Osborne has announced a review into scrapping deeds of variation on wills, commonly used by families to avoid inheritance tax. It's time to make sure your will is tax-efficient

Chancellor George Osborne has pledged to review deeds of variation (DOVs) as part of his crackdown on tax avoidance. What would the removal of this tax planning measure mean for you and what can you do to avoid paying inheritance tax (IHT) on an estate you want to pass directly to your children?

Who will be affected?

Deeds of variation (DoV) enable beneficiaries of a will to amend the will as long as everyone agrees and changes are made within two years (if those changes are made for tax reasons). The main reasons include passing an estate to the children of beneficiaries for inheritance tax reasons, providing for someone not included in a will, moving the deceased's assets into a trust or clearing up errors or unfair elements of a will.

The inheritance tax threshold (below which there is no inheritance tax liability) is currently £325,000 for an individual or £650,000 for a couple, and the tax is charged at a rate of 40 per cent. The Labour party leader Ed Milliband benefited from a DOV when it was used to amend the terms of his father's will to avoid a future IHT liability.

Will the change go ahead?

Mr Osborne has announced a "review of the use of deeds of variation for tax purposes", to be completed by the autumn. But given the uncertainty over the general election there is no guarantee if, or when, amendments to the scheme would go ahead.

"This was an impressive display of political theatre by the chancellor," says Jim Meakin, head of tax at Baker Tilly. "But we may have to wait until the 'real' Budget after the general election to see if the policy announcements made today will remain on the agenda, and what else we can expect to see in the next parliamentary term."

The Conservative party is also understood to be keen to balance out the DOV review with an intended rise in the IHT threshold, or nil-rate band, from £325,000 to £1m, meaning direct beneficiaries of an estate would not have to pay IHT on properties worth up to £1m.

Stephen Ford, head of investment management at Brewin Dolphin said: "The chancellor's announcement on deeds of variation leaves us with uncertainty - but we'd assume that the trade-off will be the much-anticipated £1m IHT relief offered in the Tory manifesto." Simon Blowey, divisional director of family planning at Brewin Dolphin, added: "The expected loosening of IHT didn't materialise, heading that useful tool of family tax planning - the deed of variation - unexpectedly back into legislative play.

"The trade-off for a tightening of legislation here will surely give way to a manifesto pledge to remove the effect of IHT upon the family home."

That could make DOVs a moot point for some people. But you should still seriously think about what the change could mean for you if abolition does go ahead.

 

How could it affect you?

You could be affected if you have an out-of-date will or one that is not tax efficient or if you are likely to be the beneficiary of a will that is either unfair or not tax-efficient. If DOVs are disallowed, families will no longer be able to amend a will after death and could have to make do with an unsatisfactory will.

 

What should you do now?

If you are thinking about amending a recently deceased individual's will, the uncertainty means now is the time to do it. Nicola Waldman, partner at Hodge Jones & Allen, says: "There is a two-year time limit from the date of death which is very strictly imposed and there's no leeway on that. So for anyone who's died you might want to think about doing it sooner rather than later."

But for most people, the best thing to do is update your will regularly and consult as many family members as possible. Petronella West, co-founder and director at Investment Quorum, says: "People don't keep wills up to date. They shove them in a drawer and never want to think about it again.

"But you should be addressing your will annually. Being tax-efficient and regularly reviewing your finances is really important. Are you taking account of tax issues and are you being as effective as possible, whether using annual exemptions, using small gifts, being disciplined about your approach to either spend all your money or pass it on?"

She says: "Having a sensible family conversation is by far the most sensible route to making a will. You really don't want estates to be contested."

Julie Hutchison, savings and tax expert at Standard Life, says: "Any families whose loved one has died and who are thinking about varying how the estate is distributed, should take legal advice now, in case deeds of variation become less flexible later this year as a result of the consultation.

"Many people don't keep their wills up to date, or don't have one at all, and a deed of variation is a very useful tool to support families in tidying up what happens after a loved one dies. A deed of variation can result in less inheritance tax being due, and this is clearly one of the factors driving the consultation."

 

Are there other things I can do to reduce inheritance tax on my estate?

It is also worth considering whether DOVs are actually the best path. There are several ways of reducing your inheritance tax bills before death through gifts, and in certain situations this could be your best option.

Apart from the chunk of your estate you can pass on tax-free, you are also able to make gifts to beneficiaries which remain free of inheritance tax as long as you do not die within seven years of making the gift.

There may be cases where one spouse dies and the other is able to inherit the estate and gift it to the intended beneficiaries, removing any IHT charge, as with the following example.

Spouse A dies, leaving her estate to spouse B, who has no need for the estate and would prefer to leave it to his children. He suggests a DOV, which would result in the estate passing from spouse A directly to the children, who then pay IHT on its value above the nil-rate band of £325,000.

But spouse B would be better off taking spouse A's nil-rate band and combining it with his own, allowing a total IHT-free allowance of £650,000. He pays no inheritance tax on the estate and gifts it to his children. As long as the gift is outright (this means if it is the family home, he would no longer live in it or accept rent payments from it) and he dies after seven years, the children will not have to pay inheritance tax on the estate. If he dies within seven years there could be an IHT liability on the value of the estate above the joint IHT threshold.