In the UK, when a deceased person leaves assets, property, or money, that can take benefit of that inheritance. In some cases, it is common for a person to not want to keep the inheritance and pass that benefit onto someone else. This process, referred to as “signing over” or “disclaiming” an inheritance, is known to be permissible by law under certain conditions. The law prescribes exactly how this can happen and also who can benefit instead and what tax consequences may arise. This guide covers the legal processes and tax implications as well as practical points on transferring or disclaiming an inheritance in the UK.
Understanding Inheritance in the UK
As given in the proper legal definition, an inheritance is the assets, property, and possessions that are inherited by the beneficiaries after a death by way of will, or when there is no will, by way of the intestacy laws. In the UK, terms of inheritance, something that can be inherited, include a cash inheritance, a property inheritance, an investment inheritance, or simply personal possessions or effects.
The beneficiary in the will, or determined by the intestacy laws, is entitled to take it upon them. However, a person can decline the inheritance or cut out a beneficiary to switch their benefit for someone else.
Why Someone Would Want to Sign Over an Inheritance
There are many reasons why a person wants to refuse or not keep an inheritance. They may already have enough assets and want to offer support to other family members. They may also want to avoid some additional tax payment or complication in their finances. It may even be for emotional reasons, as they don’t want additional memories associated with the deceased. Also, sometimes, individuals may want to direct their inheritance to help someone in more need.
The Legal Right to Refuse or Redirect an Inheritance
In the United Kingdom, the law gives a beneficiary the right to refuse an inheritance through a Deed of Disclaimer or redirect it to another individual by using a Deed of Variation. The Deed of Disclaimer or Deed of Variation ensures that the transfer is valid and adheres to tax and inheritance law. Generally, if the beneficiary accepts the inheritance, the right to refuse or redirect the inheritance is lost. So timing is important. Refusal or redirection of the inheritance must be voluntary and not pressured by any individual.
Deed of Disclaimer—Refusing an Inheritance
A deed of disclaimer is a legal document that signifies that a beneficiary does not want to accept their inheritance. In this case, the asset stays in the estate and is to be treated as per the terms of the will or the rules of intestacy. The beneficiary does not have any say as to who it goes to next. The law will determine the next person entitled to that benefit. This is often done when a beneficiary does not want the inheritance as a result of personal, financial, or tax reasons.
Deed of Variation—Redirecting an Inheritance
A deed of variation enables a beneficiary (the original beneficiary) to (1) redirect their gift to a person of their choosing. This is quite different from a deed of disclaimer, as it allows the assets to be redirected while having the ability to retain some tax benefits. The Deed of Variation allows them to help other family members, reduce the inheritance tax payable by the estate, or correct a potentially unfair distribution under the will. Both the original beneficiary and any new beneficiaries must agree to the terms and sign this document within a two-year period from the death of the deceased.
Tax Implications of Signing Over Inheritance
The tax implications of keeping, refusing, or signing over an inheritance are an important factor in deciding whether to take any of these actions. If the estate is worth more than £325,000, it is very likely that if you hoped to transfer the inheritance to your heirs or to a charity, you could actually reduce the amount of inheritance tax (IHT) liability due at the estate by executing a Deed of Variation. Of course there are strict legal requirements about how the Deed of Variation must be completed and by whom. Additionally, if you decided to sell the asset or property after signing it over to your heirs as part of the process of signing over your inheritance, capital gains tax (CGT) would also likely become relevant. Having paid a professional to help manage the implications of tax on the process is the best way to efficiently ensure you have completed your inheritance transfer.
The Two-Year Rule for Inheritance Transfers
The law states that if you use a Deed of Variation to sign over inheritance from your parents or family members, you must complete it within two years of the date of death. This enables you to treat it as if it was a gift directly from the deceased to the beneficiary for IHT and/or CGT. If you fail to meet this two-year timeline, you could incur additional taxes, so if you are seriously considering signing over your inheritance, you should act sooner rather than later in the process.
Effects on Means-Tested Benefits
Refusing your inheritance or signing it over may affect your entitlement to some means-tested benefits such as Universal Credit or Housing Benefit. If public bodies think you have done this deliberately to make yourself eligible for benefits, it may be considered as deprivation of asset treatment and may lead to lower or no payments. Beneficiaries should always think about how their decision could affect current or future benefit claims before taking action.
Inheritance of Property: Extra Considerations
If the inheritance includes a property, this can add another layer of complexity. Ownership of property needs a legal conveyancing transaction for ownership transfer. A deed of variation can redirect the property to someone else, but the relevant mortgage transfers and property deeds need to be checked first, along with any joint ownership arrangements. Additionally, depending upon the circumstances, stamp duty land tax may be due if the transfer involves any payment or consideration. When it comes to property-related inheritances, we recommend obtaining professional legal advice.
Can I sign over part of an inheritance?
Yes, beneficiaries can also choose to sign over part of their inheritance rather than the lot. This gives them flexibility to retain assets they want to keep and to pass other parts onto different recipients. So, for example, someone could keep a sum of money but sign over a property to another family member. These transactions still need to meet the legal formalities, so a partial disclaimer or a partial variation still requires appropriate documentation. Advice that is legal and professional
Inheritance law can be complicated, particularly if there are taxes, property, and family relationships involved. By obtaining advice from a solicitor, you are ensuring that any legal documents are appropriately drafted and submitted in a timely manner.
A tax advisor can assist with minimizing any potential liabilities. A financial advisor can assist with understanding and managing the long-term impacts of your decision. Professional guidance assists you to avoid making mistakes that create the potential for disputes or financial loss.
Case example: redirecting inheritance to children
A common example arises when parents direct their inheritance (or part thereof) at their children (again via a Deed of Variation). For example, when an adult child inherits a sum of money from a parent – let’s assume they do not use it themselves – they redirect the inheritance to their own children to help them start out with education or to help them purchase a house.
This can potentially reduce tax absorption while still ensuring that the property ends up in the hands of who it was most desired for and used where it was most required. To confine the legals to avoid any potential liability for incorrectly departing on providing the consideration via KRFY on the executed deed will be a valid and efficient transfer.
Alternative Options to Signing Over Inheritance
Rather than simply redirecting or refusing an inheritance, beneficiaries can accept the asset and then give it to another at a later stage of life. That option may be easier; however, gift transactions can have different tax implications, particularly inheritance tax liability if the donor dies within seven years of making the gift. By independently considering all options and consulting professionals, an informed financial and legal decision will be made.