Spectre of inheritance tax sees grandparents’ wills changed after death to skip a generation

As the government seeks to balance the books, even the modestly well-off fear hefty inheritance tax bills. This is driving many to change their parents’ wills after their death to transfer money they have been left to grandchildren instead, skipping a generation.

Passing money directly to grandchildren means avoiding the possibility of being subject to inheritance tax twice – first when a grandparent dies and again when the parent dies and that same money passes to their own children.

Hodge Jones & Allen wills & probate partner Nicola Waldman says: “The younger generation are struggling to get on the housing ladder or afford childcare and home improvements, while the over 50s who are comfortably off are inheriting large sums from their own parents. Combine this with frozen inheritance tax thresholds, future reductions in certain exemptions and the inclusion of pension funds from 2027 and many are thinking about gifting their own windfall directly to their children rather than waiting to pass it on as part of their own estates in years to come.

“Provided you are confident you can afford to give up your own inheritance, changing a will retrospectively with a ‘deed of variation’ so that this money never forms part of your own estate for inheritance tax purposes, can be a tax efficient way of preserving wealth for the next generation.”

You can change a person’s will after their death provided:

• Any beneficiaries left worse off by the changes agree.
• The process is completed within two years of death.
• The beneficiaries forgoing inheritance are over 18 years old (children cannot consent).
• There are sufficient funds in the estate to pass on once all tax liabilities are covered.

Beneficiaries forgoing inheritance should also consider their future care needs. If they are aware of an imminent requirement for care and give away the means to pay for it, the local authority can refuse to cover the cost.

A deed of variation can also be used where an individual dies without a will and the intestacy rules mean the estate is divided in a way that sees grandchildren excluded or has other negative tax consequences.

Nicola explains, “If someone dies intestate, the estate is divided up according to the intestacy rules. In some cases this can mean money and assets that might otherwise have been left to the deceased’s spouse without incurring inheritance tax liabilities, instead pass in part to their children who do not benefit from those same exemptions.

“In these circumstances, assuming beneficiaries agree, a deed of variation can be used to switch more of the inheritance to the spouse so that it is not subject to inheritance tax.”

For beneficiaries who want to ensure they make use of the inheritance tax reductions available to those who leave money to a charity, a deed of variation can again prove a valuable option.

“Gifts to qualifying charities are entirely exempt from inheritance tax and while the headline inheritance tax rate is 40%, if an estate leaves at least 10% of its taxable value to charity, the remainder of the estate will be charged a reduced rate of 36%,” says Nicola.

“Where an individual has left nine percent of their assets to charity, for example, changing the will to increase that to 10% will still see a net financial benefit, despite more money being given away.”

Making the decision to vary a will and give up an inheritance needs careful consideration to ensure that it is affordable and that all beneficiaries back the change. If parents can happily pass the money on to adult children who need it far more than them, then it’s possible to reduce the risk of hefty inheritance tax bills further down the line.