Inheritance Tax And Dov

[Alagopus]

I am trying to work out how Deed of Variation (DoV) affects Inheritance Tax (IT).
My understanding is that when Spouse 1 dies leaving everything to Spouse 2 no Inheritance Tax (IT) is payable (regardless of the size of the estate?) then when Spouse 2 dies the tax free threshold rises to 650,000 (GBP).

Scenario1: Spouse 1 dies, Spouse 2 pays no IT. Spouse 2 dies IT is payable after 650,000GBP. [Presumably the estate will be smaller depending on how long Spouse 2 survives].

Scenario2: A DoV is used after Spouse 1 dies to divide the estate four ways (Spouse 1 plus 3 children). IT is payable on 75% of the estate with a 325,000 GBP tax free threshold? When Spouse 2 dies there will be a further 325,000 GBP tax free threshold and further IT? [Again the estate will be smaller due to living costs].

Using a DoV seems to benefit the children by insuring they get their inheritance at the expense of the surviving parent who has less to live on. As far as IT is concerned the DoV reduces the % of IT but is likely to be calculated on a larger estate.

Further confusion arises regarding how long the second spouse survives. What is the significance of seven years?
Apologies if this is confused. I would appreciate any corrections and/or comments.

[ubasses]

When spouse 1 dies as you say as long as there is a Will and everything is left to spouse 2 no IHT. When spouse 2 dies they inherit 100% of IHT threshold whatever that is at death of spouse 2. ie. if IHT threshold has increased by time spouse 2 dies say to £400,000 then they will get that amount.

Do not forget that anything in joint names of spouses is not included in Estate of spouse 1.

If Will or DOV is used to give 75% of Estate to children and sole Estate is over IHT threshold spouse 2 will only have their IHT increased by 25% on death.

However if 2 inherits everything they can then give lifetime gifts to the children and there will be no tax to pay if they live a further 7 years. Even if they die within that period the tax will be tapered depending of length of time.

[Alagopus]

Thank you for your reply.

Am I correct that the '7 years' relates to a lifetime gift and is nothing to do with DoV?

Also I don't quite understand the third paragraph. Does that mean that any reduction in IT gained from the DoV is then added on when Spouse 2 dies?

[Peter Pedant]

I think you have a good basic grasp of the law relating to this

money now or possibly more money later ....

and clearly to work that one out ( principle of time discounting ) you need a calculator and a few guesses about what will happen in the future

and yes if you give it the kids then you cannot retain the benefit ( interest in possession / reservation of benefit )

If both spouses are living then it seems sensible to take advice about rewriting the wills so that the need for a deed of vafiation is avoided -
you seem to have a good idea of what is involved

[Alagopus]

Peter Pedant, thank you for your reply. Things are becoming clearer - I hadn’t considered the ‘more money later’ option; that’s highly unlikely! I am actually investigating this from the child’s perspective and needed clarification of facts other than, “So and so did this and saved a small fortune in IHT.”

A DoV is unlikely as not all siblings agree. Most believe that their parents’ wishes should be respected especially as great care was taken with the setup and none of said siblings is ‘in need’.

[Peter Pedant]

It seems that very sensibly you are wondering if a wills settlement is gonna work or not

you will need specialist advice to redesign a work in progress
that is whether you are wondering whether to unwind something and settle it again. You have to remember that taxes may well not cancel each other out ( ha ! ) but in fact double

so if you unwind something and then distribute the assets - then you basically need to live 7 y to clear it ( except for the first 355k etc blah blah blah can I have £200/h to continue this advice and so on as money pours into lawyers' pockets )

and yes you are right some pinko MPs have taken advantage of trust and DoV to famously escape IHT which is after all called a voluntary tax. Miliband did so under Gregor's will and there are a few others one memorably who is fond of libel suits.

I took the money now/ more money later opti0n ( note no agreement ) having found I had screwed myself over the rules on serial giving ( you cant in short ) and having no chance of surviving 7 years

Serial giving - a PET of 100k to little johnnie in 2010 and another pet to same fella in 2013 counts for IHT purposes as one PET of £200 k starting at 2013 ( ignoring for principle purposes then 355k bit )

see here you have to scroll down a bit

http://penguintaxplanning.co.uk/misconception-around-gifts-taper-relief/

] hooray found it again - been looking for this ref for yonks as no one seems to know the rules on serial giving ]

[Peter Pedant]

// A DoV is unlikely as not all siblings agree. //

o god we arent related are we ?

in the event of dispute in jointly owned inherited property a judge is likely to order - sell the whole lot and divide by four

and respecting grandad's wishes is great (!) xc when Johnnie says it is X and Jennie says uit was without doubt Y and Mrs Mopp down the road says where's my bit ? twenty years ago....

giving now makes it very obvious what your wishes were

[Peter Pedant]

divide by the number of joint owners oops sorry