Should you disclaim or vary an inheritance

Introduction

Receiving an inheritance from a loved one can be a very emotional experience and may also give rise to tax issues.  It may be that your personal circumstances are such that receiving an inheritance increases the value of your estate to a level where you become concerned about inheritance tax (IHT).

Redirecting an Inheritance

It is possible for changes to be made to the distribution of an individual’s estate after they have died to mitigate capital gains tax (CGT) and IHT.  The changes can be made in one of two ways:

1. A Variation; and/or
2. A Disclaimer.

What is a Variation?

A Variation allows you to redirect the inheritance you receive under a Will or the Rules of Intestacy so that the person you are gifting your inheritance to is deemed to have received it under the terms of the deceased’s Will for IHT and/or CGT purposes.

For a Variation to be valid the following conditions must be satisfied:

• The Variation must be evidenced in writing and signed by the beneficiary who is redirecting their inheritance. The executors of the deceased’s estate will also need to sign the Variation if it results in a larger IHT bill;
• The Variation must be executed within two years of the deceased’s death;
•  The Variation must not be made for any consideration in money or money’s worth. In other words, the person who is receiving the benefit of the gift should not pay anything to the individual who is making the gift.
• The Variation must contain a statement to the effect that certain tax provisions under the IHT and CGT tax codes should be included.

What is a Disclaimer?

A Disclaimer operates differently from a Variation.  It is where a beneficiary under the Will chooses not to accept the gift made to them by the deceased.  It is important that the beneficiary has not accepted the gift as it is not then possible to disclaim it.

The following should be noted to ensure a disclaimer is valid:

• A beneficiary is unable to disclaim only part of a gift; and
• It is advisable for a disclaimer to be made in writing to the executors of the deceased’s estate although it may be made orally.

The main differences between a Variation and a Disclaimer is:

• The individual who is disclaiming their inheritance may seek some form of monetary consideration from the person who benefits under the Disclaimer.  This is prohibited under the rules applying to Variations; and
• Under a Variation the beneficiary who is making the gift can decide who should receive the benefit of the gift whereas the beneficiary cannot do this with a Disclaimer because the terms of the Will to determine who will inherit it.

This can often produce some unexpected results.

Example

Mr Lucky sadly dies and leaves his estate equally between his two children, Soo and Not-Soo and if either child dies before him then the deceased child’s share passes to his or her children in equal shares on reaching the age of 25.

Soo has done very well financially and decides that she would like her brother, Not-Soo to receive her share of their late father’s estate.  Soo does some research on the internet and decides to disclaim her interest in her late father’s estate thinking that it will pass to her brother under the terms of their late father’s Will.

By entering into the Disclaimer Soo is treated as having died immediately before her father for the purposes of the Wills Act 1837. Under s33 of this Act Soo’s children will inherit her share of her late father’s estate. The Disclaimer is therefore, ineffective.

If Soo had taken legal advice she would have been advised to enter into a Variation where she could have nominated her brother, Not Soo to receive her share of their late father’s estate. 

For more information call Malcolm Emery on 07708 613 789 or email him at malcolm.emery@legalstudio.co.uk