Deeds of variation can be a valuable tool where someone believes that their inheritance could be better directed. This might be to protect beneficiaries from predatory behaviour, or to ensure that an estate is spent wisely.
A deed of variation allows changes to be made that are deemed for Inheritance Tax (IHT) and Capital Gains Tax (CGT) purposes as though they had been written into the Will or Intestacy Rules. This can have significant tax advantages.
what is deed of variation
A deed of variation (also known as a deed of family arrangement) is used to change the distribution of someone’s inheritance after their death. It allows beneficiaries to redirect all or part of their inheritance into a different beneficiary’s hands. It can also be used to reduce inheritance tax (IHT) liability. The deed must be signed by the current beneficiaries and any new beneficiaries as well as the Executor/s.
A Deed of Variation can be made either before or after the grant of probate has been issued to start administering the estate. However, for tax reasons it must be done within two years of the deceased’s death.
It can be used to add a new beneficiary to the estate or to remove a existing beneficiary. The new beneficiaries will need to be over 18 years old and have full mental capacity in order to consent to the deed. It can also be used to compromise disputes over the devolution of the estate and claims under the Inheritance (Provision for Family and Dependants) Act 1975.
The most common reason for using a deed of variation is to redistribute an inheritance so that it benefits another person. This could be a close friend or relative who is in financial difficulty or a charity that the deceased had supported. It may also be an opportunity to safeguard against predatory behaviour or the chance that a beneficiary’s inheritance will be spent too quickly and end up in the wrong hands.
Deeds of variation can also be used to save IHT or CGT on an estate. If the deceased’s arrangements are not particularly tax-efficient, or if they die without a valid Will (and their estate is passed according to the Intestacy Rules), a deed of variation can be used to redirect an inheritance into the hands of a beneficiary who is exempt from paying IHT, such as a spouse or charity.
A deed of variation cannot be used to change the executors or add or remove powers of attorney. In those circumstances, a court application would be required which is costly and time-consuming.
When is a deed of variation appropriate?
Occasionally, it may be appropriate to draw up a deed of variation in order to alter the arrangements set out in a deceased person’s Will or in their Intestacy Rules (in the absence of a Will). There could be a number of reasons why a beneficiary wants to change these arrangements. There might be a desire to make the arrangements more in line with their wishes or so that they are more tax efficient.
Inheritance Tax (IHT) and Capital Gains Tax (CGT) are important considerations when deciding whether a deed of variation is the best option. The main tax advantage of a deed of variation is that for IHT and CGT purposes the new beneficiaries are treated as having received the assets in question directly from the deceased, so that any reliefs available under the relevant laws are applied.
This can be particularly useful where the original beneficiary had already made a gift out of their own estate, such as to a charity or spouse, so that these assets are not added back into their own estate at IHT time. This can also be helpful where the original beneficiary is not able to benefit from the gifts made by the deceased, such as if they are unable or unwilling to take their inheritance.
Another use for a deed of variation is to deal with situations where there are disputes over the devolution of the estate or claims under the Inheritance (Provision for Family and Dependants) Act 1975. A deed of variation can be used to compromise such disputes and to prevent a dispute from going to court.
Deeds of variation can be drawn up before the executors get a grant of probate or they can be made after the administration process has been completed and the assets have been distributed. If a deed of variation means that more inheritance tax is payable, the executors must notify HMRC of this within six months of making the deed.
However, if a deed of variation does not mean more inheritance tax is payable, then there is no need to notify HMRC. It is important to seek legal advice before deciding on the appropriate action for a particular situation. The right legal advice can ensure that a deed of variation is tailored to the individual circumstances and provides the maximum benefits for the beneficiaries.
What should be included in a deed of variation?
A deed of variation allows a beneficiary to change how the deceased person’s estate will be distributed. It can be used to give more to one beneficiary and less to another, or it can be used to change the way that assets are redirected within an existing trust. Deeds of variation can also offer tax advantages.
For inheritance tax (IHT) purposes the deed must clearly state that the original legacy is being redirected for IHT purposes and not as a ‘gift with reservation of benefit’. This is important because for IHT purposes a gift is only exempt from IHT if it is given away free of charge.
The deed must be signed by the current beneficiaries and any new beneficiary as well as by the Executor of the deceased’s estate. This shows that everyone concerned agrees to the changes. In addition, it is vital that the deed includes all relevant details such as the name and address of the person giving away part of their inheritance and of the people receiving it. It must also include the date on which it was signed.
Sometimes, a deed of variation will be used to settle a claim against the estate. For example, one of the beneficiaries may need their inheritance sooner than the other beneficiaries. The deed of variation can be agreed to compensate the beneficiary for this and allow them to receive their inheritance earlier.
In other cases, a deed of variation might be used to take inheritance out of the estate. This could be the case if a beneficiary dies shortly after inheriting from the estate, or it may be the case if a beneficiary wishes to use their share of the estate to pay for care home fees.
A deed of variation can be made whether or not the administration of the deceased person’s estate has been completed and the property has been distributed. However, if the property has produced income since the distribution, then this must be taken into account when deciding on what should happen to it. Deeds of variation can also be varied but this must be done within a specific time frame and in the correct format.
How should a deed of variation be prepared?
A deed of variation must be prepared carefully and bespoke to a person’s individual circumstances. It must include clear signature sections for the current beneficiary, any new beneficiaries and the executor/s. It must be signed in front of witnesses to be valid. It must also state that the document varies a Will and that the changes are agreed between all parties. If the original Will included a trust, then any trustees involved must also agree to the deed of variation. The document must also state whether any inheritance tax is payable as a result of the changes and it is important that any new beneficiaries understand any potential impact on their tax status.
Deeds of variation can be used to redirect an inheritance after death if the deceased did not make their intentions clear in their Will (or in accordance with the Intestacy Rules). It is also possible to vary a Will so that it benefits charities, and to find more tax-efficient ways of splitting an estate.
A Deed of Variation can be made either before or after the grant of probate is issued. However, it is a good idea to have a lawyer specialising in Wills and Probate Law draft the document because a mistake could render it invalid.
If a change is made to an asset which is held in joint tenancy (such as a house) then a court will need to approve the deed of variation. This is because severing the joint tenancy is not something that can be achieved via a Will. If a beneficiary is under 18 or lacks mental capacity then the court will need to consent to a deed of variation as it will need to be in their best interests.
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It is important that a Deed of Variation is made on the basis of a full and accurate account of the deceased’s assets and property and this includes any income generated by those assets since the distribution was completed. It is also important that the deed of variation is drafted with the assistance of expert legal advice as it can be very complicated and any mistakes will have significant consequences.
