“My father died recently leaving an estate worth nearly £1.5 million, which we understand from our solicitor is £500,000 over the Inheritance Tax exemptions for him (taking into account the house being left to his children which is worth around £425,000) as our mother left everything to him when she died. He’s left his estate to me and my brother equally. He’d been talking to us about adding a bequest of £150,000 in his will for the local hospice where our mum died but hadn’t done it before he became ill. My brother and I have agreed we’d like to honour that wish.
We could just each make a donation but our solicitor says that it might be worth doing a deed of variation on the will which will save Inheritance Tax. Can you explain how that works please?”
Carl Lamb, Executive Director at Smith & Pinching responds
Your solicitor has clearly examined your father’s estate and determined that estate not only takes advantage of his own Nil Rate Band (Inheritance Tax exemption) but also that passed on from his late wife, including the additional amount of Residence Nil Rate Band that is granted when the value of your home is passed to your direct descendants (children, grandchildren etc). The maximum combined Nil Rate Band for a couple passing on their entitlements in this way, including the Residence element, currently stands at £1 million.
A deed of variation allows the beneficiaries to change a will, which might be desirable for a range of reasons. It might be for Inheritance Tax planning purposes alone or, as in your case, perhaps to redistribute the estate in a way that the deceased person might have intended. It can also be used where the beneficiaries feel that they would like to distribute the estate in a different way to that set out in the original will. It does normally have to be agreed by all the beneficiaries.
I’m assuming that the hospice is a registered charity so yes, this variation could make a difference to the Inheritance Tax (IHT) liability on the estate. Bequests to qualifying charities are indeed exempt from IHT and will therefore reduce the taxable value of your father’s estate. A bequest of £150,000 to a charity could potentially cut the IHT payable by £60,000 so would make a significant difference to the overall IHT liability.
In addition, if your father’s estate donates more than 10 per cent of its net total (the value after settling any debts, funeral costs and any costs involved in administering the estate) to charity, the rate of IHT payable drops from 40 per cent to 36 per cent. It’s certainly worth bearing this in mind when thinking about the amount of the bequest: it’s possible that the donation you are proposing will allow the estate to qualify for the lower rate, depending on the actual values involved.
Any opinions expressed in this article do not constitute advice. They assume the 2020/21 tax year and may be subject to change. If you would like to make a no cost exploratory review to see how Smith & Pinching can help you, please email: firstname.lastname@example.org