Deed of Variation mess

[Taxedtothemax]

I'm worried I've made a stupid mistake that will mean my siblings and I have to pay more IHT.

Background: Dad died last year leaving his entire estate and house to mother (she is on the deed as well) . Her Will is a mirror of his and her estate will be split between me and my siblings when the time comes since dad is dead. Probate is still not completed for dad as his estate is fairly large (estimated at about 1million). My mother is showing early signs of dementia (still has capacity most of the time) and my sister and I have LPA. Mother lives with sister but will likely need to go into a home soon. Mother has in excess of £400k in her own accounts and will get a substantial widows pension soon.

We have had three different solicitors from the same firm work on dad's probate due to staff changes. The previous solicitor (a locum) suggested we do a Deed of Variation so that dad's estate could pass directly to us children since mum didn't need the money (and it was proving hard for her to gift us any money as banks view her as a vulnerable customer and kept freezing her accounts if transfers made). So we all agreed on the DOV (but I was the main sibling to discuss it with the solicitor). It's signed and done so can't be revoked but I'm sat here feeling worried. Am I right in thinking that we are now going to have to pay IHT where none would have been due if we had just left things alone and not bothered with the DOV? Feel like I've cost my siblings a lot of money.

I understand that no tax would have been due for mum to pay as dad was leaving everything to his wife. But now that my siblings and I are the beneficiaries (thanks to the DOV), we will need to pay 40% of anything over £500k (£325k threshold plus property allowance)? Is that right. But if we had left well alone and got nothing until mum passed away, mum would use dad's £500k allowance in addition to her own £500k allowance so no tax would be due unless her estate exceeded 1 million? Is that correct?

Thanks in advance. And yes, I know I'm lucky and am very grateful for this money.

I should add, mum wanted the marital home to be sold so the proceeds of that sale have been added to dad's estate.

First I am sorry your dad has died and your mum is unwell. It's hard to reply to this with the sensitivity I would like to but is it possible the DOV was recommended to make sure your dad's estate didn't get absorbed by care costs that your mum may incur?

Where's she going to be living? Is she going to take her half of the value of the house and buy a retirement flat? If she's going to have a property worth half the old house plus 400,000 then that sounds like she have enough assets to be fully utilising her own IHT allowance anyway, unless I'm missing something? In that case you'd be paying IHT early, but not necessarily paying more than you eventually would.

You are losing the opportunity for her to make potentially exempt lifetime gifts to you, but if she's got advancing dementia then that might not be an option.

Did the solicitors not mention the IHT implications at any point?

Thank you. Well mum has plenty of money for care and is late 80s. Once her pension starts being paid she will have more than enough.

She is not capable of living independently. She will go in to a home soon. No, the solicitor didn't mention IHT and it was all rather rushed.

Sorry about the loss of your dad.

You aren't paying any inheritance tax. It's not your money until after iht is paid. Your dad pays it and he doesn't miss it as he doesn't need it any more. You can't miss what you never had, so all is well.

In the event that any iht at all is due, that makes you among the wealthiest 4% - 96% of estates are too small to pay any.

So honestly, worrying about whether option A or option B will remove more in iht is a massive privilege. Wouldn't it be great if instead of fretting about how much wealth they can keep, the richest 4% of families were happy to know that a small proportion of their deceased relative's wealth would go to improving the lives of those whose inheritance is limited to a photo album and £10.50 in thr current account.

I don't think it would necessarily be wise to have the money held by your mum in amy case. Yes maybe you might pay a bit more tax now but who is to say what the rates and thresholds will be by the time your mum comes to the end of her life. You may find you saved more in the long run. It sounds like your mum has sufficient assets to use her own full allowance anyway in which case there wouldn't be any saving from the option to pool two allowances across two estates. It would only make a difference if your mum's assets were massively lower.

Nb if your mum's name was on the house deeds already then either the house does not form part of the estate at all if they were Joint Tenants, and only 50% of it is part of the estate if they were Tenants In Common. This may significantly reduce your estimate for what amount of the estate will be in excess of the tax free allowance.

I think by doing the DoV the iht burden will be less. There is the 325 exemption for your father, but your mother also has an exemption of 325. Plus if the property is left to a child(ren) there is an extra 175k allowance. So there is a 500k exemption from iht on your father's estate.

If your dad's estate is £1m and your mum currently has £400k plus half the house value (unless that is already sold and the £400k is from that?) then there was always going to be IHT paid on the amount over £1m after your mother passes away. The main difference is when the tax is paid.

The original will meant nothing would be paid now as it all passed to your mum and the total estate would be calculated, £1m deducted and 40% tax on the rest.

The way you are now doing it each parent has their own calculation. Your dad's is £1m less £500k so tax on £500k now.
Your mum's will be £400k plus half the house value less £500k and then tax on whatever is left over.

It's hard to give calculations as you don't say the value of the house and if that is included in your dad's £1m and your mum's £400k. But as I see it, as long as your mum still has £500k of cash / house proceeds on death, then it's just the timing of when the tax is paid. If she has less than £500k of cash / house proceeds on death then she won't use all of her allowances and you will have paid more IHT than you needed to.

Also if the house was in joint names then your mum has likely inherited that automatically so is that covered by the deed of variation?

If one assumes that the assets don’t grow in value over time and that your mother doesn’t spend any of the wealth before she dies then you are simply paying any tax earlier than you would otherwise (also assuming a future government doesn’t change the IHT bands/allowances and rate).

You may of course be paying more tax now than if your mum spent lots on care and gave big lump sums away and lived 7 years after that date; and conversely you may be paying less tax now than if the assets had raised in value before you inherited them. So in some ways horses for courses.

With hindsight you should have had both scenarios calculated to inform your choice before DOV…

IHT isn’t the only factor of course… by inheriting earlier you have opportunity to invest in ways that could greatly increase the assets…

I am thinking of doing a Deed of Variation for most of what I inherited from my mother recently. I have enough for my own future from savings and a good final salary. The tax implications for my children is something I need to take advice on.

I think I will still have an estate above my IHT allowance of £500,000 ( am divorced so get single persons allowance) as my house alone is worth more than that. I bought my bungalow 12 years ago for £380,000 and have spent about £25,000 on modernising it, it was valued at £695,000 last year and I’m sure will get at least that as bungalows are in high demand where I live. I also have some savings which I dip into for large purchases such as cars, holidays, house maintenance etc but that pot is dwindling and not being added to.

However, I did not expect to inherit much from my Mum when I did my retirement planning so it makes sense to gift some of it to my three children now. My retirement plan was to spend all my savings and then downsize to a smaller apartment and have another pot to spend - my pensions do not quite cover my regular outgoings, I was always planning on using my savings and equity.

I need to take legal and financial advice on the next steps. Luckily I recently found out that the bulk of my investments are in a pension fund ( made up of FSAVC I paid into when working plus a lump sum from my ex husbands pension fund when we divorced many years ago) and do not form part of my estate for IT purposes. In the worst case scenario, my children have access to that fund immediately on my death so can use it to pay any IT!

I was very interested to read this quote from a previous poster

“In the event that any iht at all is due, that makes you among the wealthiest 4% - 96% of estates are too small to pay any.”

I really don’t think I am I’m the wealthiest 4% of the population, I have a monthly pension of less than £2000 a month and savings ( before my recent inheritance) of less than £400,000. It is the value of my bungalow and being divorced that puts me in the position of paying IT.

I hope that I get good advice about doing a DOV because the last think I want to do is make my death complicated for my children.

“In the event that any iht at all is due, that makes you among the wealthiest 4% - 96% of estates are too small to pay any.”

96% of estates don't pay any IHT as they are below the thresholds. But that doesn't mean the people who died weren't wealthy. Many wealthy people take steps while alive to understand the IHT implications of their current assets and take steps to reduce the potential tax liability through gifts to children, trusts etc.

The OPs parents' estate seems to be £1.4m and allowances will be £1m. Let's assume the other £400k is taxed at 40%. That's £160k in IHT. If the parents had given £400k of cash to their children 7 or more years ago there would have been no IHT to pay and the children would have got an extra £160k inheritance between them. The IHT might easily have been avoided.

The point is that had the DofV not been done your father's nil rate allowance would have been 325k because he left the property to your mother so no RNRB. So by doing the DofV you have saved around 70k as you could take advantage of the RNRB £175k. That's what I was trying to say in my earlier post but not very well. You have definitely done the right thing.

Does the property allowance still apply if the property has been sold? I thought it was only when a property was passed down as a residence, hence the term residence nil rate band.

I would make enquiries with a different firm and see if you have a case to sue the solicitors for bad advice. You should have correspondence clearly setting out the reasons for the DOV and IHT liabilities.

You're mistaken here. Any unused allowances get passed on to the surviving spouse.

Without the DoV, everything was left to the surviving spouse and so no IHT was payable. Since no allowances were used that means that the whole £500k is passed to the surviving spouse and is available to be used on their death.

You keep the allowance if you downsize or move into a care home and leave equivalent cash to direct descendants.

Thank you for all the responses. The house was sold recently for £690 000 and the money is with the solicitor handling probate, forming part of dad's estate. Mum's £400k in her own bank accounts is separate from the proceeds of the house sale.

I'm aware we should have looked into this much more. The locum solicitor said we needed to act quickly as probate nearly complete. I feel stupid now. I'm really worried my siblings will be angry with me for this. Our relationship isn't great as it is.

@Another2Cats this is what I now realise

@Taxedtothemax "...we will need to pay 40% of anything over £500k (£325k threshold plus property allowance)? Is that right. But if we had left well alone and got nothing until mum passed away, mum would use dad's £500k allowance in addition to her own £500k allowance so no tax would be due unless her estate exceeded 1 million? Is that correct?"

The practical upshot of this is, if your mum passes away within the next three years then there will be no difference in the amount of tax paid (assuming her estate is worth at least £500k at the time) but if she lives longer than that then there may have been a slightly better way of doing things.

If your mum were to pass away within the next three years then the only difference with a Deed of Variation is that you pay some of the IHT now and the rest later. This is compared with not doing a DoV and you would have paid the same amount of IHT but you wouldn't have to pay it until your mum had passed away. This assumes that your mum's estate is worth at least £500k and so can make full use of the £500k allowance.

So, if everything had gone to your mum, when she passed away her estate would be worth £1.4M and there would be £160k to pay in IHT.

With the DoV, if £1M is passed to the children then there would be £200k to pay in IHT and then when your mum passed away there would be no IHT to pay on the £400k that she left. So, in this situation, you are looking at paying an extra £40k in IHT.

However, you don't say how much of your dad's estate has been passed on to you and how much your mum now has in total.

"...the marital home to be sold so the proceeds of that sale have been added to dad's estate."

Don't forget that only half of the main residence would be counted as belonging to your dad. Does the £400k figure include your mum's half share of their home or is this in addition to it?

If, for example, your mum's estate was worth £500k rather than £400k then you would pay exactly the same amount of IHT in either case.

You said that your DM was on the deeds of the house? Presumably the house was held as tenants in common, otherwise it wouldn't have been part of probate, but what's happening to her £345,000? Has she signed that over to you along with the deed of variation? or is she bundling it into her own savings?

Together with her savings it takes her comfortably over the £500,000 limit, so you're quite likely (depending on care home costs and pension) to get full use of both parents' nil rate IHT band.

"The house was sold recently for £690 000 and the money is with the solicitor handling probate, forming part of dad's estate. Mum's £400k in her own bank accounts is separate from the proceeds of the house sale."

Was the house jointly owned? If the house was sold for £690k then £345k of that is your mum's and only £345k is part of your dad's estate.

Thanks again. The fact is that I don't know yet the exact amount of dad's estate but from some documents I have seen and comments from the solicitor, I think it's about £400k in various bank accounts plus this £690 from the sale of the house. The house was in joint names for mum and dad. The DOV mentions the house (which was not sold when the DOV was signed... completion was a week later) would pass to us children aswell. This is why it was rushed. So I'm really confused as to whether half of the house money now goes to mum or not. At the moment the money is sat with the solicitor who is handling probate. As I said, this is the third solicitor we have been assigned and no sooner had she started last month then she has had to go on bereavement leave so I have not been able to speak with her.

A deed of variation could cover the half of the house your DM was due to receive as the surviving joint tenant, but it wouldn't cover her own half of the house that she already owned would it?: that would need to be a separate transfer though it could perhaps have been included in the same document.

Questions for the solicitors, but I hope we're clarifying the issues for you at least.

Thank you, you've helped a lot. I'll try to get hold of the solicitor asap.

Had a similar sounding situation and no inheritance tax payable until the surviving parent died 13 months later.