Kings Court Trust Corporation

Retrospective tax planning

If you are the beneficiary of a will and you inherit assets that will increase the Inheritance Tax liability of your estate, it is possible to execute an Instrument of Variation so that some or all of the inherited assets are passed directly to your beneficiaries (using the nil rate band allowance) and hence reduce your future Inheritance Tax Liability. This is also known as Retrospective Tax Planning.

How it works

Bill and Mary owned their house jointly, worth £400,000. They also had financial assets of £100,000 each, so their joint estate is worth £600,000.

Bill died and left all his property to Mary. There was no IHT to pay as the property was passed from husband to wife.

Mary now has assets worth £600,000. The current tax free allowance is £300,000 so when she dies, she will have a taxable estate of:

£600,000 - £300,000 = £300,000

With IHT at 40%, this means her two children would pay £120,000 in Inheritance tax.

Mary consulted Kings Court after Bill died and we prepared an Instrument of Variation for Bill's will, so that all of his assets of £300,000 are left to the children. There is still no IHT to pay on Bill's estate because it is not above the tax free allowance. Mary's estate is now worth £300,000 which is also within the tax free allowance and so Mary's children will have no IHT to pay when she dies. This will save them £120,000.

How Instruments of Variation work - the details

An Instrument of Variation is a legal document, which if signed within 2 years of death, enables the original beneficiaries to redirect assets under a deceased’s estate, even where they did not leave a will.

It can be used to:

• Reduce Inheritance Tax

  All alterations made under the variation are treated for inheritance purposes as having been effected by the deceased person and not by the original beneficiary.

• Reduce Capital Gains Tax

  Alterations made by the variation also do not constitute a disposal for Capital Gains purposes and are deemed as having been made by the deceased person.

• Redirect assets, which would automatically pass to a joint owner

  The ownership of assets can be severed, so that the deceased's share passes under their estate, and does not automatically pass to the joint owner.

• Redistribute assets to the next generation

  It is possible to redirect assets, so that they pass to the deceased's children or grandchildren, instead of passing to the surviving spouse.

• Provide for someone, who has been omitted from the will or not adequately provided for

• Improve, correct or clarify the contents of the deceased's will

• Establish a trust in the deceased's estate