CASE STUDY – Inherited monies – using a Deed of Variation (DoV)

 

As client circumstances can be so varied, we have produced a series of case studies to detail some of the challenges that your clients may face and how we have helped similar individuals to reach their financial goals. This issue, we continue with the theme of Inheritance Tax:

Circumstances

We were approached by Mr & Mrs Cameron in 2002 and they required advice with regards to investing a substantial sum of monies they were due to receive from the Estate of Mrs Cameron’s parents. 

Objectives and concerns 

Mr & Mrs Cameron already had substantial assets of their own that they drew income from. They were also considering making some gifts in a few years time to their children. Mrs Cameron was horrified at the amount of Inheritance Tax (IHT) that was paid on her parents Estate and wondered what they could do about their own IHT liability. 

We began by ascertaining their exact financial position and it soon became apparent that they had a large IHT liability. We explained that whilst we could add significant value by arranging investments in line with their original enquiry, we could save them more than £1million of unnecessary IHT if they were willing to allow us to arrange holistic, overall financial planning for them.

Planning arranged 

I asked if anyone had mentioned a Deed of Variation to them, but they had never heard of this. I explained that they had a very short period of time to take advantage of one of the most flexible IHT planning options available to UK based individuals.

A Deed of Variation allows an individual to effectively alter the Will of the person making a bequest to them, within two years of the date of death and it is deemed as though the deceased has made the alteration. In practical terms, this means that Mrs Cameron could redirect her Inheritance elsewhere rather than into her own and Mr Cameron’s Estate to be subject again to IHT further down the line. Mrs Cameron felt this was imperative because otherwise the money that had already had IHT levied on it at 40% could in the future be hit with another 40% tax charge! 

Whilst many professionals sometimes recommend that a Deed of Variation be used to redirect monies straight to other beneficiaries (i.e. grandchildren), this is not always the best solution. 

Following extensive discussions and having considered the different options available and the benefits and drawbacks of each, Mr & Mrs Cameron arranged a Deed of Variation (through a local Solicitor we were able to recommend to them) which redirected the amount inherited into a Trust. They were Trustees (along with their Solicitor) and controlled the monies and due to their requirements, they later granted themselves a loan of the amount inherited. This meant that to all intents and purposes they were in the same financial position as before they arranged the Deed of Variation. However, the main difference was that on their deaths, the amount they had borrowed from the Trust would be deducted from their estate before any IHT was due. 

During 2004 we spent some time working out what Mr & Mrs Cameron could afford to take as extra income, how much they could afford to gift to their children and restructuring their investments. In time they repaid a substantial amount of the loan from the Trust and we arranged suitable investments in the Trust, as this saved IHT on the growth of these assets. In 2004 they decided to gift £400,000 to each of their three children. They have now survived 7 years since the date of the gifts and so have reduced their potential IHT liability by £480,000. This is a saving that would not have been made had they gifted monies directly by the Deed of Variation.  

Mr & Mrs Cameron have felt comfortable in eroding the value of their personal estate by spending and enjoying their capital and income and making generous gifts to their children, knowing they can draw monies from the Trust at any time. Even though their main residence is worth in excess of two IHT ‘nil rate bands’ and they have significant personal savings and investments, due to the outstanding loan from the Trust they currently have NO IHT liability! This planning has reduced their personal IHT tax liability by over £1 million.

Review 

As Mr & Mrs Cameron no longer have an IHT liability, our focus is simply on ensuring that their savings and investments continue to provide the income and growth that they require. The Trust has annual Tax returns to be dealt with and a periodical 10 yearly charge to IHT, but these charges are a fraction of the original IHT liability. The other significant benefit of the planning arranged is that it will help their children & grandchildren save IHT, as it works for generational planning, not just for them.

Who can help put a sensible plan into place?

Professional Financial Centre (East Midlands) Ltd has helped many clients like Mr & Mrs Middleton to put a sensible financial plan into place for the rest of their lives. When looking at the arrangements available we are able to prove that we have your interests at heart. As changes happen, we review our clients’ plans, adjusting them to meet changing economic circumstances and family needs. 

As a result of our qualifications, experience and culture, we qualify to be included on the SIFA Professional Directory of IFA’s, which is endorsed by the Law Society. 

As a member of the Derby Law Society, by quoting code LS1 you and / or your clients will receive a 5% reduction in our costs.

Richard Shanks (Managing Director)

Professional Financial Centre (East Midlands) Limited

Wesley House, St Michael’s Lane

Derby

DE1 3DW

01332 341406

Authorised and regulated by the Financial Services Authority. This article is not a recommendation and you should obtain appropriate advice before acting on any of the information provided