HMRC Inheritance Tax: Customer Guide

Can I alter an inheritance following a death?

Can I change an inheritance after death?

Yes, but all the beneficiaries who would inherit less as a result of the change must agree. The change is called a variation.

A variation can

  • affect the amount of Inheritance Tax payable on the death
  • alter how HM Revenue & Customs (HMRC) might charge Capital Gains Tax in the future

If the beneficiaries making the variation want it to take effect for Inheritance Tax, Capital Gains Tax or both, the variation must contain a statement to that effect.

I am a beneficiary. Why would I want to make such changes?

There are many reasons. For example, you may want to:

  • take account of the differences in the personal finances of the other beneficiaries and so give a larger, or smaller, amount to one of them
  • give the inheritance to a younger generation, for example, if you inherit under your father's will you might want to give your inheritance to your own child instead
  • for other family reasons, like increasing the inheritance of the surviving husband or wife or civil partner

If you are thinking about making a variation you may wish to speak to a solicitor.

Do I have to make a will in the first place?

No. If there isn't a will, the laws of intestacy normally apply, but your heirs can change the way people benefit from your estate by making a variation.

Will a variation affect the amount of Inheritance Tax due?

Possibly, it depends on the size of the estate and who inherits it. Inheritance Tax is not due on transfers between spouses or civil partners. So, for example, if the amount that a husband leaves to his wife is varied for the benefit of the children, then Inheritance Tax could be due on anything redirected to the children.

Can variations apply to the whole estate?

No. A variation must relate to assets the deceased owned, or to their share of assets held jointly. If it relates to assets held in trust or a gift with reservation of benefit, it will not affect the amount of tax payable.

How does the variation take effect for tax purposes?

If the variation includes a statement that it is to take effect for Inheritance Tax, Capital Gains Tax or both, the variation is treated as if the deceased had made it. In other words, the variation is effectively backdated to the date of death for these taxes.

How does this affect the amount of Inheritance Tax due?

The amount of Inheritance Tax due as a result of the death can rise or fall.

These examples show what HMRC mean.

Example 1

If the deceased's son wants to give some of his inheritance from his father's estate to his mother then he will pay less Inheritance Tax because HMRC will treat the gift as though the deceased had given it to his wife. HMRC do not charge Inheritance Tax on transfers between spouses or civil partners.

Example 2

A person who inherits from their spouse or civil partner may want to give some of the inheritance to their son. If they do, the amount of Inheritance Tax due on the estate may be higher because HMRC will treat the gift as though the deceased had given it to their son, which means Inheritance Tax is due.

However, many variations do not affect the amount payable. For example if:

  • a child of the deceased passes an inheritance to their own child, the tax stays the same
  • the part of the estate on which HMRC charge Inheritance Tax remains below the Inheritance Tax threshold; there is still no tax to pay

How does this affect the amount of Capital Gains Tax due?

For Capital Gains Tax, the effect of a variation is that HMRC treat the new beneficiary as owning the asset from the date of death instead of the date of the variation, and the variation itself is not a disposal. However, if the variation sets up a trust, it is still the beneficiary - not the deceased - who has made the variation and who is regarded as the settlor.

In Example 1, if the gift from the son to his mother included some assets on which Capital Gains Tax is due (for example, stocks and shares or land and buildings), there will not be any immediate charge to Capital Gains Tax as a result of the variation. However, when the mother disposes of those assets, HMRC will work out her Capital Gains Tax liability as if she had acquired those assets at the date her husband died and at the value at that time.

Can a variation take effect for any other taxes?

A variation cannot be given 'retrospective' effect for any other taxes. In other words, it is not backdated to the date of death for taxes other than Inheritance Tax or Capital Gains Tax.

Where a variation is made while an estate is being administered, it might change who is entitled to receive the income from the estate during the administration. This will change who has to pay Income Tax on that income, and possibly also the amount payable, but only from the date of the variation.

I am a beneficiary. How do I make a variation?

For a variation to take effect for Inheritance Tax, Capital Gains Tax or both, it must meet the following conditions.

  • You must make the variation within two years after the death.

    There is no facility to extend this time limit. If you make the variation more than two years after the death, HMRC cannot give it 'retrospective' effect for Inheritance Tax or Capital Gains Tax. A variation made on the second anniversary of the death will qualify provided it meets all the other conditions.
  • The variation must be in writing and signed by all the beneficiaries who would lose out because of it.

    Usually a solicitor will draw up a formal deed, but this is not essential. If the variation affects the interests of children (or even of children not yet born) you should speak to a solicitor, as you may need the approval of a Court. A parent's signature on behalf of a child is not sufficient.

    If the variation means that more Inheritance Tax is due, the executors or administrators must also agree to the variation and must sign it.
  • The variation must contain a statement that it is to take effect for tax purposes.

    If the beneficiaries who are making the variation want it to have 'retrospective' effect for tax purposes, the variation must contain a statement of intent to that effect. The beneficiaries can choose whether the variation takes effect for Inheritance Tax only, for Capital Gains Tax only or for both taxes. For example, this statement would mean that the variation takes effect for both taxes.

    'The parties to this variation intend that the provisions of section 142(1) Inheritance Tax Act 1984 and section 62(6) Taxation of Chargeable Gains Act 1992 shall apply.'

If the variation does not contain a statement of intent, it will not have 'retrospective' effect for tax purposes

  • The variation must clearly state the inheritances that are changing and how you are altering them.

    In other words, for the parts of the estate being varied, your variation should set out:
    • how the estate originally passed under the will or by intestacy
    • who is now to receive the benefit from the inheritance as a result of the variation.
  • The variation must contain a Stamp Duty certificate if the instrument of variation alters the destination of stock, shares or marketable securities.

    The words for an exemption certificate are 'I/We certify that this instrument falls within category M in the schedule to the Stamp Duty (Exempt Instruments) regulations 1987'.

    A variation will only be effective without an exemption certificate if it has been stamped with the duty by the Stamp Office. You can find out more about this by phoning the Stamp Office Helpline on Tel 0845 603 0135.

    Please note that from 1 December 2003, any instrument effecting a land transaction only, does not require stamping, as such transactions fall within the new Stamp Duty Land Tax regime. Thus any instrument of variation that varies the devolution of land only requires no certificate of exemption to be attached.
  • A variation must only relate to assets the deceased owned, or to their share of assets held jointly.

    For Inheritance Tax, a person's estate includes assets held in trust in which they had a right to get some personal benefit and gifts with reservation of benefit. For tax purposes, HMRC cannot treat a variation that seeks to change who is to receive assets in either category as if the deceased had made it.
  • The variation can only change who is to receive the same assets or entitlement under a will or by intestacy once.

    The destination of the same assets or entitlement passing under a will or by intestacy cannot be varied more than once. HMRC will not treat any variation that does so as if the deceased had made it.
Example

If Charlie is the original beneficiary of a legacy of £10,000 he cannot redirect the legacy to someone else and then on to a third person.

If Charlie is the original beneficiary of a legacy of £100,000 he can redirect £10,000 to Ian, and can subsequently (out of the £90,000 left) give another £10,000 to Ian or a completely different person.

If one beneficiary has already varied their share of residue by one variation, another beneficiary may vary their share by a subsequent instrument because it is not the same entitlement that is being varied.

  • You cannot make the variation in connection with another transfer.

    Where you make a variation and use assets from outside the estate to compensate the original beneficiary for their loss, HMRC will not treat the variation as if the deceased had made it.
Example

Albert dies leaving an estate of £300,000 to his sons. They sign a variation to give the assets to their mother, Agnes. To compensate her sons, Agnes then pays them £300,000 from her own assets. Even if the variation contains a statement of intent, it will be ignored in working out the Inheritance Tax that is payable on Albert's death.

You can find more information and a checklist of these conditions on form IOV2

Can I correct errors in a variation?

Yes, if they are only minor typing errors. If the errors create uncertainty, or if you have left out or wrongly stated something, you will need to get the approval of a Court. If approved, the corrected version will stand in place of the original one. Again, you will almost certainly need to speak to a solicitor.

What do I do when the variation is signed?

This will depend on what the effect of the variation is. If the variation:

  • Does not change the amount of Inheritance Tax due, there is no need to send it (or the checklist IOV2) to HMRC.
  • Changes the amount of Inheritance Tax due, either in the estate of the deceased or in the estate of someone else, the beneficiaries making the variation should send a copy* of the variation (and, if used, the checklist) to the Inheritance Tax office dealing with the estate concerned.
  • Means that there is more Inheritance Tax to pay, it must be sent to HMRC within six months of the date of the variation. You may be liable to a penalty if you fail to send in on time a variation that increases the Inheritance Tax payable.

*Only one beneficiary needs to send in a copy of the variation (and the checklist). Where more than one beneficiary has signed the variation, you should agree amongst yourselves who will be responsible for sending the papers to HMRC.

Each beneficiary making the variation will need to retain a copy of it (and the checklist) in case HMRC ask for it during an enquiry. For example:

  • for Inheritance Tax, if a beneficiary who made a variation dies within seven years and HMRC ask about any gifts they made, the variation will be evidence that the assets it redirected should not be added to their estate
  • for Capital Gains Tax, HMRC may exceptionally ask to see the variation for the purposes of determining a particular issue, in particular the identity of the settlor if a trust is created or varied by a variation
  • for Income Tax, HMRC may wish to see the variation as support for a change in the beneficiary who is to receive the income from the estate during administration

Where can I get further information?

HMRC produce a wide range of leaflets and information. You might find the following links useful.