What Impact Could Labour’s Autumn Budget Have on Estate Planning and Deeds of Variation?

Published On : 08/22/2024

By Bik-ki Wong, Partner and Head of the Wills, Trusts and Probate Team at Myerson Solicitors

With the recent change in government, there is growing speculation about what Labour’s forthcoming Autumn Budget might entail, particularly regarding estate planning and Inheritance Tax (IHT). 

This uncertainty has led many to revisit their financial plans in anticipation of possible reforms. 

One potential area of reform that has garnered significant attention is the legal framework surrounding Deeds of Variation. 

This topic, which gained prominence in 2015 following Ed Miliband’s family’s use of a Deed of Variation, continues to stir debate in the House of Commons.

In this article, we explore the current rules on Deeds of Variation and consider how potential changes might affect estate planning in the future.

What is a Deed of Variation?

A Deed of Variation is a legal document that allows the beneficiaries of a Will to alter its terms after the testator has passed away. 

These modifications can be made within two years of the deceased’s death, and crucially, they can be used to achieve significant tax advantages, particularly in IHT and Capital Gains Tax.

Essentially, a Deed of Variation allows the beneficiaries to redirect inheritance which they are due to receive to others instead. 

This can be highly beneficial for correcting mistakes or omissions, redistributing wealth, settling claims against the estate or optimising tax reliefs. 

For instance, if a Will leaves the entirety of an estate to adult children and excludes a surviving spouse, a surviving spouse is highly likely to be able to bring a claim against the estate under the Inheritance Provision for Family and Dependants Act 1975 and the estate could also be subject to IHT if the value exceeds the available thresholds.  

The spouse and children could therefore agree to vary the Will by a Deed of Variation to give the spouse a right to income so that the estate would benefit from spouse exemption for IHT purposes at that stage and the capital could be protected for the children when the surviving spouse dies.  

By using the Deed of Variation, this gives the surviving spouse an opportunity to reduce their estate further, for example, by making gifts so that the IHT payable is both delayed and potentially reduced further.

One of the most common uses of a Deed of Variation is to gift all or part of the inheritance due to the original beneficiary’s to their adult children. 

This technique enables the original beneficiary to enjoy seeing their children benefit from the gift.

It also reduces the original beneficiary’s estate, lowering their potential IHT exposure in the future. 

In this way, the Deed of Variation is a valuable tool for multi-generational planning, particularly for families seeking to balance financial security across generations while minimising tax liabilities.

Personal Gifting vs. a Deed of Variation

Individuals can gift money or assets to others from their own wealth. 

There is a basic gifting allowance of £3,000 (known as the Annual Exemption) which individuals can gift per tax year (6 April to 5 April the following year) either to another individual or shared between multiple people which can be given tax free.  

Once that allowance has been used, you can carry forward the Annual Exemption from the previous tax year if that allowance has not been used but any amount above that will be subject to the seven-year rule.

Under existing rules, provided that the individual survives for at least seven years following the gift, the value of the gift will fall outside their estate for IHT purposes. 

However, suppose the individual dies within those seven years. In that case, the value of the gift is added back into their estate and will count against their Nil-Rate Band (the threshold below which IHT is not charged), which currently stands at £325,000 per individual. 

This means that the estate’s tax-free allowance may be reduced by the value of any gifts made in the preceding seven years.

In contrast, when a Deed of Variation is used to redistribute an inheritance to other beneficiaries, such as grandchildren, the transfer is treated for IHT purposes as though the deceased had made the gift directly to the new beneficiary. 

This means that the gift does not affect the original beneficiary’s Nil-Rate Band, offering a more tax-efficient way of passing wealth between generations. 

As such, Deeds of Variation are very popular for families engaged in long-term financial planning, particularly those looking to transfer wealth tax-efficiently.

Potential Changes to Deeds of Variation in the Upcoming Budget

Speculation surrounding the Autumn Budget has raised concerns that the government might consider abolishing or restricting Deeds of Variation. Should this happen, the ability to alter the terms of a Will post-death could be significantly curtailed.

If Deeds of Variation are abolished or restricted, individuals wishing to pass on inherited wealth would be forced to rely on traditional gifting methods. 

This would mean that any gifts made by the original beneficiary would be subject to the seven-year rule, with the risk that their own Nil-Rate Band could be diminished if they do not survive for the requisite period. 

This could have substantial implications for multi-generational estate planning and the tax burden faced by families.

Moreover, Labour is reportedly considering a further reform that could introduce a lifetime gifting cap of £30,000. 

This new rule would operate independently of the current Nil-Rate Band for estates, effectively limiting the amount individuals can gift during their lifetimes without triggering an IHT.

Unlike the current system, where gifts are only included in the estate if the donor dies within seven years, this new cap will apply throughout the donor’s lifetime. 

Any gifts made over the £30,000 limit would immediately be subject to HT, regardless of when the donor dies.

This proposed reform could have a dramatic effect on estate planning strategies. 

The removal of the seven-year rule, combined with the introduction of a lifetime gifting allowance, would significantly constrain individuals’ ability to transfer wealth tax-free during their lifetimes, potentially increasing the overall IHT burden on families to plug the announced £22 billion “black hole” in the public finances.

What Should You Do to Prepare?

While it remains uncertain whether the government will implement changes to Deeds of Variation, it is important to remain proactive in light of the potential reforms. 

If you have recently received an inheritance from someone who passed away within the last two years, and you are considering using a Deed of Variation, it may be prudent to act sooner rather than later. 

Completing any necessary paperwork before the Autumn Budget is announced on 30th October could help you avoid being caught out by any new restrictions or legislative changes.

Similarly, if you are contemplating making significant gifts to family members, it might be worthwhile before any new rules take effect. 

Acting now could allow you to take advantage of the seven-year rule, which offers greater flexibility in estate planning than the proposed £ 30,000-lifetime gifting cap.

Given these reforms’ complexity and potential impact, seeking professional advice is highly recommended. 

Consulting with Wills Trusts and Probate lawyers who are well-versed in estate and IHT planning can help ensure that your wealth is managed in the most efficient and tax-effective manner possible.