The recent budget and inheritance tax

The recent budget scarcely mentioned inheritance tax,  which is hardly surprising in light of the coalition agreement not to raise the threshold until after the forthcoming election. The government did, however, resurrect the proposal to abolish deeds of variation, a plan abandoned last century in light of strong opposition from many, including the Law Society.
Deeds of variation are used when someone has died and their will, or the rules that apply if someone dies without one, does not make adequate or tax efficient provision for their family and dependants. Providing appropriate wording is used,  the variation made is treated for inheritance tax and, if the relevant election is made,  capital gains tax as if it were made by the testator themselves,  rather than being a gift by the original recipient to the replacement beneficiary.  The variation is not effective for income tax purposes so that if an inheritance is diverted into a discretionary trust, the transferor is treated as settlor and if they are a potential beneficiary of the trust it becomes a settlor interested trust. Similarly if money is diverted to the infant child of the original donee they will be taxed on income over £100 in any tax year.
We don’t know yet whether the proposed abolition will take effect from budget day,  6th April 2015 or some other unspecified date. If you are considering diverting an inheritance left to you by someone who died within the last two years we suggest you contact us as a matter of urgency to discuss how to proceed.
To avoid needing a deed of  variation, we suggest that you make sure your will is fully up to date. Discretionary  will trusts can mean that your family can liaise with your executors at the time of your death to decide what would be the most effective way of sharing your estate.  If the class of potential beneficiaries is wide enough,  rather than making a new will as your circumstances change, you can simply amend the instructions to your trustees to suit.
If you do not have a will, then you should be aware that the intestacy rules do not make provision for cohabitees, stepchildren or half-siblings if there are full blood brothers or sisters. They were dramatically changed last year after being unchanged for more than twenty years. Who can adminster your estate depends on the relationship rather than suitability or competence. You owe it to your family to talk to us about about making a will.