Change your entitlement to inheritance after the donor has died

Most people do not update their Will regularly. Consequently, after their death, some potential beneficiaries may have been left out or, due to a change in circumstances, other beneficiaries may no longer need their inheritance. In these circumstances, it is possible to change the Will post death.

A recent tribunal case has brought to life an extreme situation but one which many families may face. The case concerned the death of A in 1987, and the subsequent sale of one of her assets in 2015, nearly 30 years after A’s death. The family had previously been in a dispute over who owned the asset following A’s death. However, the family members who had inherited the land later agreed to pay damages to the other family members to settle the dispute.

The tribunal case focused on how the capital gains tax (CGT) liability should be calculated and specifically whether the damages could be deducted from the proceeds when calculating the CGT liability arising from the sale of the land. The tribunal ruled against the taxpayers and concluded that the damages were not a valid deduction.

This case highlights that beneficiaries often only find out their entitlement to the deceased’s assets after their death. In many cases, this is not a problem, and the estate can be distributed in accordance with the deceased’s Will. But what about those cases where, for example, an additional grandchild has been born and has not been recognised, or more commonly, where adult children are due to inherit but they don’t need the inheritance, and it’s their own children that would benefit far more from having some of their grandparent’s wealth.

In these circumstances, the parents can inherit and gift onto their children, but this means the parents will make a potentially exempt transfer and will need to survive seven years for the gift to fall out of their own inheritance tax (IHT) estate. In addition, if there is a delay between the parents receiving an asset and gifting it, they may well have a CGT liability on the disposal if the value of the asset has risen.

The most tax efficient approach is to implement a ‘deed of variation’. This allows any beneficiary to alter their entitlement. For CGT purposes, the change is effective from the date of death, i.e. the terms of the Will are effectively overridden. If the asset is income producing, the rights to income are only effective from the date of the deed.

It is also possible to vary the position if the deceased was intestate, although in this case, all beneficiaries have to agree with the change.

There is a short window during which a deed of variation must be implemented in order for it to apply retrospectively for CGT and IHT purposes – it must be made within two years of death. So, in the tribunal case, the time limit for variation was way out of date. However, if A’s Will had been clearer, or if the beneficiaries had agreed that a change was required within two years of death, the family would have avoided a lengthy and expensive tax case.

Talking about your Will is still a taboo subject for many. A deed of variation can help where beneficiaries wish to rearrange who gets what, either due to need, to reduce the ultimate IHT liability or because the terms of the Will are not quite clear. There is no ‘purpose’ test, meaning a variation for any reason is allowed.