Inheritance tax has one of the highest rates of any tax. It’s charged at 40% on the amount that exceeds a certain threshold figure.

It would be nice, then, to avoid paying inheritance tax altogether. In fact, you may be able to do exactly that, entirely legally, using a document called a ‘deed of variation’.

The only caveat is that you have to use a deed of variation within two years of the death of a person who left you their estate in their will

To see why this might be useful, consider that 1 in 25 people expects to inherit an estate worth £1 million or more, according to Canada Life’s annual Inheritance Tax Monitor survey of people over the age of 45.

According to Canada Life, over one fifth (£230,000) would be lost in inheritance tax on an estate worth £1 million.

The key figure to consider is that threshold figure, which is called the nil-rate band. It is currently set at £325,000. If one member of a married couple dies, the surviving partner gets their partner’s nil-rate band as well. This takes the total to £650,000.

Those figures cover a person’s entire estate, which could include a property and other assets like cash or other investments. You get an additional nil-rate band of £125,000 if you pass on a property to a direct descendant.

But will this extra tax-free amount be enough to prevent you paying large amounts of inheritance tax? Probably not, because UK property prices have soared. In some towns in the south of England, half of all homes are worth more than £1m, according to a report in The Guardian.

Protecting an estate you’ve inherited

But if you’ve inherited an estate in the last two years and you don’t need the money at present, you can shield it from inheritance tax. You do this by using a deed of variation to place it in a trust.

Putting it in a trust means you no longer own it, legally speaking. Instead, the legal owner is the trust. You can think of a trust as being like a company, but instead of having a board of directors, a trust has trustees.

The trustees must all be in agreement, and that’s the only real drawback of the deed of variation method. For three or more children to reach an agreement, it’s clearly going to be a tougher ask than if there are two, for example.

Setting up a loan

Provided all agree, a trust can be set up and the house and other assets placed within it. You can even get your hands on some of the money now, by setting up a loan from the trust to you.

A loan from a trust has to have a legal basis and so it must have an interest rate and a duration. But since the trustees set the rules, the interest rate could be 0% and the timescale very long!

The other benefit of setting up a trust would come if you were ever divorced. Rather than splitting these assets, your ex-partner would have no claim on them. That’s because they’re owned by the trust rather than you.

To find out more about setting up trusts and using a deed of variation, contact Maplebrook Wills on .
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