WELCOME TO CHARLES RUSSELL SPEECHLYS.
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In his pre-election budget speech, George Osborne unveiled a number of items which would be on the agenda of a re-elected Conservative Government. One of those items was a review of the use of Deeds of Variation (DoVs), planned for the Autumn of 2015, which forms part of the Government’s wider policy to clamp down on what are being labelled as “tax avoidance strategies”. In practice, DoVs are a highly useful tool which enable beneficiaries of a will to re-organise that will, providing that all affected beneficiaries agree and that the changes are made within two years of the date of death (if those changes are made for tax reasons). This Autumn the Government could decide to repeal DoVs, meaning beneficiaries would no longer be able to agree to vary a will after death. For the charity sector, DoVs are important as they encourage beneficiaries to consider re-directing part of an estate to charity in order to make use of the reduced 36% rate of inheritance tax which takes effect where an individual leaves 10% or more of his estate to charity. The removal of DoVs could therefore have a detrimental impact on the legacies charities ultimately receive.
DoVs can be used to effect a more beneficial and efficient distribution of the deceased’s estate. Where a DoV is executed within two years of the date of death, it is effective for Inheritance Tax and Capital Gains Tax purposes. A DoV can therefore be used to amend a tax inefficient will to reduce the tax liability of an estate, automatically increasing the amount payable to a charity residuary beneficiary. If instead, the charity is benefiting from a specific legacy, the residuary beneficiaries may agree to the charity receiving some or all of the benefit of the tax saving achieved. There are several common situations where DoVs can be used to the advantage of charitable beneficiaries:
As outlined above, DoVs are an important tool for the charity sector which not only encourage non-exempt beneficiaries to consider varying wills but also create opportunities for charities to generate additional legacy income. The Government has announced that in place of DoVs they may look to increase the IHT threshold (or nil-rate band) from £325,000 to potentially £1 million, meaning that direct beneficiaries of an estate would not have to pay IHT on estates of potentially £1 million or less. However, only the direct beneficiaries under a will would benefit from this change, in comparison to the much wider and more flexible benefits charities can achieve using DoVs. It also remains to be seen whether or not this tax advantage will be implemented. What is clear is that during the consultation period charities may wish to be vocal about the potential impact the removal of DoVs could have on them and the charity sector.