Hi everyone
Im trying to find out just what can be done with a DOV to save IHT. As far as children receiving inheritance from a parent, are the children only allowed to use up to the value of the NRB? If so, we get that band anyway. I can see how DOV can be used to add beneficiaries, pay to charity and save tax, bypass a generation, but i cant see how else DOV help for IHT purposes.
Ive read loads online but its all the same stuff with no depth.
Thanks
Garry
Garry,
A gift with a DOV is deemed as a gift from the deceased, if the original Will beneficiary redirected the gift themselves with out a DOV then it is a Potentially Exempt Transfer and can be added back into their estate when they die.
The NRB is used by gifts to anyone who isn’t an exempt beneficiary (spouse, civil partner, charity, plus a few more obscure places).
If the estate is substantial enough the residuary beneficiaries could also do a DOV to gift 10% to charity and access the reduced rate of IHT.
It is worth getting legal (or the appropriate tax) advice before making any decision, just be mindful of the 2 year time limit.
Kind regards,
Lyndzey Smissen
Paytons Solicitors LLP
A Will may have been made without first looking of all at the implications of inheritance taxes to the estate.
As you may know, each person has an IHT allowance of ÂŁ325,000 and on top of that, assuming they own a home, could have an additional residential allowance of ÂŁ175,000. So $500,000 in total and if an estate on death of the second spouse is within ÂŁ1 Million, then no IHT to pay.
During a persons lifetime, many actions could be taken with a view to reduce taxes, or gifts made which would still be part of the estate on death, but after death, the beneficiaries can execute a DOV to improve or just change the way the deceased estate is distributed.
Some problems may exist if beneficiaries are children, or are Trusts and you need professional guidance on this.
If there is a particularly large estate, or likely to be in the next few years, then a good specialist IHT Financial Adviser may pay dividends together with a good solicitor who is STEP qualified.
As there are so many different avenues that could be taken with each depending on the actual case, I doubt that this forum could come up with all the answers that you are looking for. However, if you wish to give specific details of an individual case, them help may be at hand, as your question is far too wide a subject.
Thank you both for the replies. To simplify things, let’s assume parent 1 dies, passes all to parent 2.
On parent 2s death, estate valued at 2m worth of property.
1m IHT free so 1m left to pay IHT tax on. I understand that 10% to charity reduces this but its still a lot of IHT.
Could the children of these parents, then use a DOV to say that either, the remaining 1m is gifted as if from the deceased or
Set a trust up to put the remaining 1m of property into, by a DOV and thus pay no IHT that way. Or would assets into a trust be charged at 20% IHT, as is the case as if assets over the NRB were added when parent was alive.
I get that using a DOV, assets can be given as if from the parent when alive but my point is, surely just using a DOV doesnt mean you can give unlimited gifts? There has to be a limit?
Hope that clears it up. Thanks
A deed of variation is not magic.
You can vary in favour of charity as you say. Nothing else is going to reduce the inheritance tax payable.
A DoV is usually arranged by a beneficiary of an estate to redirect their inheritance, thus reducing their estate and their potential IHT, not that of the deceased.
If a trust is established by a DoV, the beneficiary of the original gift from the will, who is executing the variation, will become the settlor of the trust for income tax, but not IHT, purposes.
There is no 20% tax on discretionary will trusts as the estate pays the IHT at the death rate of 40% on amounts in excess of the available nil rate band.
However, although there was no entry charge, a trust with a single settlor only has one nil rate band for the purposes of future periodic and exit charge calculations.
Thank you. It seems a lot of the stuff you read even from trained people seems to miss the important bit, that it only really helps IHT in terms of the beneficiarys subsequent IHT, not the currently deceased
I spent 50 years training so what do I know? It is not always impossible to reduce/eliminate the deceased’s IHT bill. Sometimes a variation can be made to re-direct a taxable gift to an exempt beneficiary (surviving spouse or charity) or improve things such as directing business property away from the spouse so that their exemption is not wasted on an asset that attracts 100% relief anyway. A DoV must, if it is to work for IHT, vary the deceased’s Will or the intestacy rules. It cannot be used to create lifetime gifts which the deceased might have made but didn’t.
I think the stuff that you have been reading from trained people probably assumes too much prior basic knowledge so that you may be starting at second base or higher, although what they are prepared to say outside of a proper paid-for consultation is probably very little that is worthwhile. It is also dangerous. I used to tell my actual clients that the only advice I was prepared to give over the telephone was that the basic rate of income tax is 20%. Everything else had to be in writing after consideration of all, and I mean all, the relevant facts. I never discouraged DIY activities by non-clients, as sorting out their efforts was sadly for them lucrative for me. At least it was not a matter of life and death like DIY surgery or gas fitting.
I used to often start by reformulating the client’s questions. This is not to insult their intelligence, quite the contrary. A non-expert may not always ask the precise questions to arrive at the answer sought. No one minds questioners on this Forum asking questions in the way they wish or leaving out key facts and contributors of answers do their best nonetheless. As a medium the Forum can only go so far in providing answers.
Jack Harper
Thank you for that Jack. I totally appreciate what you say about not expecting to get tons of advice, from professionals, for free. I have contacted 2 local STEP solicitors but local isnt necessarily best