Tax tip: Deeds of variation, trusts and the residence

Deeds of variation can be a highly effective inheritance tax planning tool but there are traps.

Take Mary aged 68 and divorced with a taxable estate of £600 000. Her mother Violet died six months ago leaving her whole estate worth about £950 000 to Mary. The estate includes Violet’s house worth £800 000 which will be sold. If this inheritance remains in Mary’s estate her children face an additional £380 000 IHT liability on her death.

Mary has a good pension and is financially secure. Her adviser suggests a deed of variation to redirect her inheritance into a discretionary trust. The inheritance will then skip Mary’s estate but she can be a beneficiary under the trust and benefit by the trustees making appointments to her in the future.

However there is a trap in this planning. As Violet inherited her late...