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Original poster

Deed of Variation mess

52 replies

Taxedtothemax · 29/06/2024 00:01

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.

OP posts:
Original poster
Taxedtothemax · 06/07/2024 06:44

Unwildered · 05/07/2024 10:21

Let's break down the key points and implications regarding Inheritance Tax (IHT) and the Deed of Variation (DoV).

Key Points:
Inheritance Tax Thresholds:

  1. Each individual has a nil-rate band of £325,000.
  2. There is an additional residence nil-rate band (RNRB) of up to £175,000 if the family home is passed to direct descendants.
  3. When one spouse dies and leaves everything to the surviving spouse, the unused nil-rate band and RNRB can be transferred to the surviving spouse, effectively doubling the thresholds for the surviving spouse's estate.
Deed of Variation:
  1. A DoV allows beneficiaries to alter the distribution of an estate within two years of the death, potentially for tax planning purposes.
  2. If the DoV redirects assets from the surviving spouse to other beneficiaries, it can trigger IHT if the value exceeds the nil-rate band.

Your Situation:

  1. Initial Scenario: If your father's estate had passed entirely to your mother, no IHT would have been due at that time due to the spousal exemption. Upon your mother's death, her estate would benefit from both her and your father's nil-rate bands and RNRBs, potentially allowing up to £1 million to be passed tax-free.
  2. Post-DoV Scenario: The DoV redirected your father's estate to you and your siblings. This means:
  3. The estate exceeding £325,000 (plus any applicable RNRB) would be subject to IHT at 40%.
  4. The house, being jointly owned, automatically passed to your mother upon your father's death, and the DoV could not alter this.

Implications:

  1. House Proceeds: Since the house was owned as joint tenants, it passed to your mother by survivorship, not through the estate. Therefore, the DoV could not affect this transfer.
  2. IHT on Father's Estate: If the DoV redirected other assets (excluding the house) to you and your siblings, IHT would be due on the amount exceeding the nil-rate band of £325,000.
Steps to consider:
  1. Clarify the DoV: Ensure you have a clear understanding of what assets were included in the DoV. If the house was incorrectly included, this needs to be rectified.
  2. IHT Calculation: Calculate the IHT liability based on the assets redirected by the DoV. If the estate (excluding the house) exceeds £325,000, IHT will be due on the excess.
  3. Complaint: Given the incorrect advice and the potential financial implications, you may have grounds for a complaint against the solicitor who handled the DoV. This could be pursued through the firm's internal complaints procedure or escalated to the Legal Ombudsman if necessary.

Conclusion:
It appears that the house proceeds should not have been included in the DoV due to the joint tenancy. This means your mother retains the house proceeds, and her estate will benefit from the combined nil-rate bands upon her passing. However, any other assets redirected by the DoV may still be subject to IHT.

Absolutely spot on. The new solicitor explained it just like that. The locum gave no such explanation and I highly doubt she had much Wills and Probate experience. Thank you.

OP posts:
Original poster
Taxedtothemax · 06/07/2024 06:46

DorotheaDiamond · 05/07/2024 13:29

@Unwildered if only lawyers explained things that beautifully when you actually asked/paid them! Sounds like OP has lucked out by double incompetence from the locum and won't be hit by anything at this point if the amount other than the house value is under her father's £325K allowance.

Although I think a very stern letter to the solicitors and anyone who regulates the locum is needed - this could have gone VERY wrong!

Yes. Double incompetence saved the day and a stern letter of complaint is coming. We will have to pay some IHT on dad's estate but nowhere near as much as if the locum had actually achieved what she thought she was achieving re the house.

OP posts:
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