Deeds of Variation and Inheritance Tax

By Kevin Russell | 19 December 2013

Inheritance Tax Planning: Gifts to charity

Gifts made to qualifying charities in a Will are exempt from Inheritance Tax. For deaths after 5 April 2012, where 10% or more of the ‘net estate’ is given to charity, not only are the charitable gifts tax exempt, but there is an additional incentive: the remaining estate benefits from a reduced rate of tax (36% rather than 40%).

A ‘qualifying charity’ is a charity accepted as such by HMRC. It includes UK charities plus those established in an EU state, or Norway or Iceland.

Tax planning

It is not uncommon, especially amongst Christian families, for the deceased’s Will to be legally varied after their death, using a ‘Deed of Variation’. This works to effectively re-write the Will of the deceased for Inheritance Tax purposes as if they themselves had varied their Will prior to their death. A Deed of Variation may be used in order to ‘tithe’ one of more of the beneficiary’s entitlements to charity, to bring the taxable part of the estate down in value to within the nil rate band of Inheritance Tax (which, for 2013/14 is £325,000), to enable the estate to benefit from the ‘10% or more to charity’ relief, or for other reasons.

What is rather less well known is that Finance Act 2012 changed the law in relation to Deeds of Variation. Now, for any Deed of Variation to be tax effective it is necessary to show that the recipient charity or charities have been notified of the existence of the Deed.

Donors making gifts into a Stewardship account by varying the Will of a deceased person will be automatically advised by our Giving Services and Gold Account staff on this point. Our Gold account is an ideal means of obtaining Inheritance Tax relief now whilst waiting until later to decide on the charitable causes that you would like to benefit. Further details of our Gold, and other giving accounts, can be found here.

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Posted by Kevin Russell

Our Legal Eagle guru and Stewardship's Technical Director, Kevin constantly has his finger on the pulse of all things tax and charity law-related. His briefing papers for charities, churches and individuals are an invaluable resource on everything from VAT to Gift Aid. 

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