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Variations on a theme

Combatting tax avoidance is at the heart of Government policy and scarcely a day goes by without newspapers reporting on another tax “loophole” that is set to be closed.

In last week’s budget the chancellor George Osbourne stated that he will review of deeds of variation because of concerns that they are being used for tax avoidance.

A deed of variation enables the beneficiaries of a deceased’s estate to alter the distribution of that estate, within two years of death. This can happen whether the deceased made a Will or died intestate.

Whilst deeds of variation are a way of saving inheritance tax and capital gains tax they are not used solely for this purpose. They can, for example, be used to divide an estate in a manner that suits the beneficiaries better than the division under the Will or intestacy.

For example if a widow leaves her estate equally between her three children and one of those children is much wealthier than the others and decides to give his share to his siblings this can be done using a deed of variation. There would be no inheritance tax saving as none of the siblings would be exempt from paying inheritance tax, however if it was not possible to do this using a deed of variation the gift from the brother to his siblings would be a Potentially Exempt Transfer (PET). If he did not survive for seven years after the making of the gift it would be taxed as part of his estate.

Many parents leave their estates to each other with the intention that on the second death the estate will pass to their children. There is no inheritance tax between spouses but on the second death everything above £650,000 (each spouse has a nil rate band of £325,000) will be taxed at 40 per cent.

While deeds of variation can be used to save inheritance tax that is clearly not their main or only purpose. Given that the current threshold means that individuals who are far from wealthy leave estates that pay inheritance tax giving people the flexibility to adjust how an estate is distributed should not be taken away. After all, as George Osbourne hinted at in his statement, Ed Miliband is believed to have used a deed of variation after the death of his father, and if he can benefit why should others not benefit too?