Disclaimers and Variations
A beneficiary of an estate, whether by Will or the laws of intestacy is perfectly within their rights to reject their inheritance. Beneficiaries may wish to vary dispositions of property following death in order to redirect benefits to other family members who are more in need or less well provided for and to save tax.
In order to do this there are three options:
- By Gift
- By Disclaimer
- By Variation
A gift by a beneficiary has taxed consequences if the item has increased in value since the date of death and if the beneficiary dies within 7 years of making the gift.
A Disclaimer is a simple deed in which the beneficiary gives up all rights to their inheritance. The inheritance then passes to the next person entitled under the will or on intestacy. With a disclaimer the original beneficiary has no control over who receives the asset.
A Variation is often preferred to a disclaimer because it allows the original beneficiary to choose who inherits.
Disclaimers and Variations are more tax efficient provided they contain a statement regarding the tax consequences of their decision. However Variations can cause problems for income tax which disclaimers can avoid so where possible a disclaimer by a parent is favorable to a variation where minor children are the next beneficiaries in line to inherit.
The table below provides a useful comparison
To be effective the variation/disclaimer must:
- Be in writing
- Be signed by:
- The person giving up the benefit
- The Executors if more inheritance tax is payable as a result
- Be made within 2 years of death
- Indicate the changes being made, and
- State whether it is intended to be effective for Inheritance tax and/or Capital Gains Tax
It is possible that the variation can be drafted so that it doesn’t affect the Capital Gains Tax position of the original beneficiary. Here it would be drafted so that it affected the Inheritance tax position only. This means it is treated as a gift by the deceased for inheritance tax purposes but a gift by the beneficiary for Capital gains tax. This can be beneficial in circumstances where an asset has increased hugely in value since the date of death but the original beneficiary has brought forward losses, which would negate the gain here. It would be preferable to use this rather than force the original beneficiary to eventually pay more capital gains tax when they eventually dispose of it given that they would inherit at the value at the date of death otherwise.
It is also possible to consider the gift as effective for capital gains tax but not for inheritance tax.
It is also possible to do a variation where the original beneficiary has died. This is often useful for tax purposes.
For advice and assistance in making a Deed of Variation of Disclaimer please contact us for an appointment.