UK inheritance tax – are those ‘in the know’ paying less?

User Written by Cindy-Marie Leicester on May 05, 2015.

UK inheritance tax – are those ‘in the know’ paying less?

Opposition Leader Ed Miliband hit the headlines in the UK in February for ‘dodging inheritance tax’. Ed, and his brother, former politician, David, have been accused of using a deed of variation to their father’s will that moved ownership of some of the family home into their names, thereby avoiding paying inheritance tax of 40% on the estate.

Deeds of variation allow wills to be altered after someone has died, redirecting benefits from one beneficiary to another, and can be made at any time within two years of the death. As well as correcting any mistakes that were made in the original will, they also allow an estate to be divided so that further down the line there is less tax to pay. They don’t reduce the tax bill at the time – IHT is paid on anything the deceased has left over a tax-free threshold (currently £325,000 in the UK).

So what exactly did the Miliband brothers do that so upset the UK press? In effect, they exploited a tax loophole to reduce the future tax bill on their mother’s death – a common practice until the Government introduced the ability to transfer Nil Rate Tax band allowances between spouses in 2007. By exploiting the loophole, 40% of the ever increasing value of their father’s property, located in Primrose Hill, one of London’s most exclusive neighbourhoods, was transferred to his two sons by deed of variation in 1994. Each brother received a 20% share of the property and reduced their potential tax bill from the £170,000 which would have been due if their mother had retained 100% ownership to just £78,000.

Inheritance tax is a massive source of revenue for HM Revenue and Customs raising £3.4 billion for the Treasury in the 2013-14 tax year. This represented an increase of £300 million on the previous year but was still below the 2008 peak of £3.8 billion. The question many people are asking is ‘Are those ‘in the know’ paying less?’.

Frank Nash, tax partner at accountancy firm Blick Rothenberg, says the effect of the deed used by the Milibands is no different to that which would have been achieved if there had been a well-written will in the first place. “What the deed seems to have done is to pass the £150,000 tax-free allowance from the father directly to the children,” he says. “If the father had sat down a month earlier and written the will to do that there would have been no issue.”.

So does using a deed of variation make you a tax dodger or is it merely an appropriate use of available tax reliefs to ensure that a legacy actually goes to the intended beneficiaries? The press will no doubt continue to debate this for years to come. The fact is that deeds of variation are a safety net which can sometimes prove useful however, it is far better to review and update your will regularly to be sure it reflects your wishes and incorporates legitimate, acceptable and effective planning under the legislation currently in force.

Disclaimer: Infinity is not licensed or qualified to give tax advice.
This article is intended for information only and does not constitute tax advice. If you are in any doubt about your tax status please contact a qualified professional.

Cindy-Marie Leicester

Cindy-Marie Leicester

Posted on May 05, 2015 in Estate Planning.