CALL 0800 437 0322 9am to 6pm – Mon to Fri
Submit enquiry

Estate administration case studies

Peter – deed of variation and tax saving

Peter was married to Jane and they had three adult children.

Peter and Jane had two rental properties that they owned as tenants in common, so that they could leave their shares of the properties under the terms of their respective Wills. (If they had owned them as beneficial joint tenants on the death of one of them, their share of the properties would have passed to the survivor, automatically).

Peter’s Will left his share of the rental properties to his three children and the remainder of his estate to Jane. Peter died in 2014. Because the value of his share of the properties was more than his available nil rate band (£325,000), this gift created an immediate liability to inheritance tax (IHT) and because the remainder of the estate was spouse exempt, the IHT had to be grossed up, creating an even larger liability to IHT.

We advised Jane and the children that Peter’s gift to the children could be varied to limit the amount passing to them to Peter’s available nil rate band with the remainder of the gift passing to Jane. This was achieved by all the children and Jane signing a deed of variation to Peter’s Will. Because this was signed before any IHT had to be paid, it avoided any cash flow issues of paying the IHT and then reclaiming it.

The end result was that there was no IHT to pay on Peter’s death. The share of the property that Jane inherited will still form part of her estate for IHT purposes, but she can decide what if any lifetime tax planning she wants to do. In any event, because of the terms of her Will, there will be no grossing up for IHT purposes when she dies.

There were other options in this case to avoid an immediate liability to IHT – which were to pass the entire estate to Jane, or as above, but with the excess over Peter’s nil rate band passing into a life interest trust for Jane’s benefit.

Sally – normal expenditure out of income

We acted for Beth, Sally’s daughter who was the sole executor and beneficiary of her mother’s estate. In the last seven years of her life, Sally had given Beth regular gifts of money, albeit of varying amounts, in excess of the £3,000 annual exemption. Initially, it was assumed that these would have to be brought back into account to calculate the inheritance tax liability on Sally’s estate i.e. that all of those potentially exempt transfers had become chargeable.

But, we could see that there was a regular pattern of giving and that although Sally’s annual income was quite high, she had not needed all of her income to meet her day to day living expenses, which were modest. So, we suggested that Beth should claim the normal expenditure out of income exemption, as far as possible on those lifetime gifts.

When we reviewed the gifts and the net income available to Sally in the seven years prior to her death, we were able to claim that a substantial proportion of the gifts made in the last seven years of her life were in fact covered by the normal expenditure out of income exemption, thereby substantially reducing the IHT liability on Sally’s death.

To be able to make a claim for this exemption, it must be shown that:

1. It was made as part of the donor’s normal expenditure;
2. It was made out of their income; and
3. That the donor had enough income left (after the gifts) to maintain their usual standard of living.

A word of warning – many of these words have very specific meanings and interpretations and so each case must be considered on its own particular circumstances.