My mum wants to disinherit my sister: What tax will I pay if I split my share with her?

I am my mum’s full-time carer for six days a week and I go home for one day to spend with my husband and family.

Before my mum became ill she changed her will and has left everything to me. She does not have a relationship with my sister, but I do.

Sadly when my mum dies I know this is going to cause terrible upset, and therefore I have decided I will give my sister half of the money from the house sale.

Can you help me with how this is going to affect me tax-wise? I have two part-time jobs and a pension. The property is probably worth about £450,000.

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Heather Rogers replies: So often when a family member dies, there are so many arguments and fall-outs regarding assets that relationships break down permanently.

It is refreshing when you hear from people who only wish to do the right thing and be fair, even when you are clearly sacrificing a lot of your own life to be your mother’s carer.

If your mother does not wish to change her will and wants to leave everything to you, that is fine and that is her wish.

However, you as her beneficiary clearly feel differently and have other intentions when your mum does eventually pass away and you inherit her estate.

Regarding how you put this plan into effect, you will not need to gift half of any property sale proceeds direct to your sister yourself.

Instead, this could be done by something known as a ‘deed of variation’. Please be aware you should take legal advice before you do this.

What is a deed of variation?

A deed of variation is a document that allows beneficiaries of a will to make changes to the distribution of the estate.

It allows beneficiaries named in the will to add new beneficiaries by altering the distribution of the assets between themselves. 

How does this affect the tax position?

For inheritance tax and capital gains tax purposes, the position is usually such as if the distribution had been made by the deceased through the will.

This means that the transfer of any of the assets from an existing beneficiary under the will to an additional beneficiary is treated as though the gift was left to them in the will of the deceased, not as a gift from the beneficiary to them.

If you were to make the gift to your sister directly, as you originally planned to do, you could run into some personal tax issues, and therefore the deed of variation may be the better option, but as mentioned above, do take advice in advance of any decision. 

See the box on the right for an explanation of inheritance tax, and look here for a previous column on how capital gains tax works.

How does a deed of variation work?

– All affected beneficiaries have to agree to the change in writing.

They need to be over 18 years old (there are special rules for any affected beneficiaries that are minors and involves court approval).

– The deed of variation must be made within two years of the date of death. It can be done before or after probate is granted.

– The deed can be executed even after the assets have been distributed, so long as it is within the two-year period.

– It needs to be signed by all affected beneficiaries and should be clear as to what changes have been made and who benefits from them.

– The deed must include a statement that the signatories intend the variation to be valid for both inheritance tax and capital gains tax.

– It must be sent to HMRC within six months of being signed, if it results in more inheritance tax being payable on the estate.

– You can vary the distribution of the estate even if the original beneficiary dies, as long as the variation is still within the two year period. Take legal advice on this.

– If the deceased died without leaving a will, what is known as ‘intestate’, then the law decides who inherits in a specific order. (This is a very good reason for making a will).

However, if the beneficiaries of such a distribution agree, a deed of variation can still be done.

– You don’t have to vary a will via a deed. It can also be done by letter or other document, so long as it is in writing.

However it is better to involve a solicitor or tax adviser to do this, to avoid any issues and to ensure that all parties fully understand the nature of any changes.

What are the advantages of a deed of variation?

Apart from including a family member or a special friend who has been excluded, many deeds of variation are used for inheritance tax planning purposes.

For example, a father may leave his estate to his son, but his son already has a large estate of his own and so a deed of variation is done by the son after his father’s death, to pass on his father’s inheritance to his own son, the grandchild of the deceased.

The grandchild inherits as though he was the named beneficiary in the will and avoids the money passing through the son’s estate, reducing the liability for inheritance tax.

Making charitable donations can also be a popular choice. If 10 per cent of the estate is left to charity, a reduction in the inheritance tax rate from 40 per cent to 36 per cent applies.

Deeds of variation can also be used to ensure a vulnerable family member receives the care they need, or to move assets into trust.

In addition, they are useful if a will has to be made in a hurry, due to serious illness.

A simple will can then be made, leaving the full estate to the spouse for example, and they can consider any other distributions within the two-year period.

Are there disadvantages to a deed of variation?

Once a deed of variation is made, it can’t be changed.

Also, if a redistribution of assets means that a creditor could not collect their debt as a result of the redistribution, then it would not be valid.

This includes those in receipt of means-tested benefits.

If the beneficiary voluntarily gives away assets inherited from an estate through a deed of variation, they may become ineligible for their benefit, as the inheritance could be considered as part of the means-tested assessment.

Ask Heather Rogers a tax question

Tax expert Heather Rogers answers our readers’ questions

Heather Rogers, founder and owner of Aston Accountancy, is our tax columnist. She is ready to answer your questions on any tax topic – tax codes, inheritance tax, income tax, capital gains tax, and much more.

If you would like to ask Heather a question about tax, email her at taxquestions@thisismoney.co.uk.

Heather will do her best to reply to your message in a forthcoming monthly column, but she won’t be able to answer everyone or correspond privately with readers. Nothing in her replies constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

Please include a daytime contact number with your message – this will be kept confidential and not used for marketing purposes.

If Heather is unable to answer your question, you can find out about getting help with tax here, including sources of free professional advice if you are elderly and/or on a low income.

You can also contact MoneyHelper, a Government-backed organisation which gives free assistance on financial matters to the public. Its number is 0800 011 3797.

Heather gives tips on how to find a good accountant here, including when to seek help, hiring the right type of firm and typical costs.