Gift and inheritance tax: why consider an act of modification


If you inherit the money, you can redirect your inheritance, perhaps to the next generation.

Usually when you do this it is a gift from you. This means that you have to survive 7 years for it to leave your own estate for inheritance tax. If you make a donation and die within 7 years, the donation is considered part of your estate and is subject to inheritance tax (IHT). Thus, IHT can be charged against an inheritance which you never took but which you sent to someone else. You can avoid this by signing a Deed of Family Arrangement or Deed of Amendment.

What is an act of variation?

A deed of amendment (also known as a deed of family arrangement) is a formal legal document in which you redirect your inheritance. This variant says that the inheritance is not for you but belongs to someone else you named and then passes directly to that person.

What are the advantages of an act of amendment?

This creates a leapfrog effect so that the legacy never passes through you. You are treated for the IHT as if you never had it and that you had made no donation and that it is therefore not taxed at the IHT on your estate, and the 7 years do not have not important.

A Deed of Family Arrangement or Deed of Amendment may even allow you to have your cake and eat it. Usually, if you donate and still have access to the transferred asset, it never leaves your estate for IHT. With a Deed of Family Arrangement or Deed of Amendment, you can turn your inheritance into a trust for you and other family members and this trust can benefit you. This trust may give you access to the asset, but it is not yours for IHT.

It also allows families to get along with each other to share the inheritance in a way that works best for them, without negative consequences for the IHT.

This planning must be done within 2 years of the death of the person you are inheriting. There are technical anti-avoidance rules and specific requirements for the wording of the deed to be followed before this planning works for tax. Therefore, early legal advice is essential.

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