A Deed of Variation is a legal document that allows beneficiaries of a deceased person’s estate to alter the way assets are passed on. This can be done to redirect part of an inheritance to children, support a charity, or pass inherited assets to a trust to protect them. A Deed of Variation can bring both practical and tax benefits.
In this simple guide, we’ll explain what a Deed of Variation is, how it works, who can use it, and the tax advantages it can unlock.
What is a Deed of Variation?
A Deed of Variation is a legal document that allows a beneficiary of a deceased person’s estate to redirect all or part of their inheritance in a tax-efficient manner. It can be used to alter the distribution of assets inherited via a Will or through intestacy, and it can be used to alter the distribution of any assets, including personal possessions, money, and shares of residue.
Despite the name, a Deed of Variation doesn’t have to be made by deed; a less formal document can often suffice. It is sometimes also referred to as an ‘instrument of variation’.
Why make a Deed of Variation?
For the variation to be valid for tax purposes, it must be in writing, include the required statutory declarations, be signed within two years of the date of death, and the person making the variation cannot be compensated with assets from outside of the estate in return for their gift.
There are many reasons a Deed of Variation may be useful. A key benefit of a variation is that it allows the original beneficiary to control where the assets they are redirecting end up. Common uses of a Deed of Variation include redirecting assets to children, supporting a charity, and passing inherited assets to a trust to protect them.
- To provide for others in greater need of funds.
- To make a charitable donation.
- To create a new trust or add to an existing one.
- To use a more tax-efficient way to distribute the estate and save IHT and/or Capital Gains Tax (CGT).
- To make a fairer distribution between beneficiaries.
- To provide for someone who the Will or intestacy failed to make provision for, potentially avoiding a claim against the estate.
How can it save tax?
A Deed of Variation is often used to achieve IHT savings. This could be because the deceased’s estate distribution wasn’t very IHT-effective, prompting the beneficiary to reduce the IHT payable. Alternatively, the beneficiary may be well-off and wish to pass their inheritance to the next generation, avoiding their own inheritance taxes.
For instance, consider a married person who dies intestate (without a valid Will). As a result, their surviving spouse inherits only a portion of the estate, while the rest passes to their adult son. If the estate’s value is substantial enough that the son’s inheritance incurs IHT, a Deed of Variation can be used to avoid this, provided the son consents. The son can then vary his inheritance to redirect it entirely to the surviving parent, effectively avoiding any IHT on the deceased’s estate since they benefit from the spouse exemption.
Another advantage for the beneficiary making the variation is that the Deed of Variation treats the gift as though it was made by the deceased, thus avoiding any lifetime IHT issues. Without the Deed of Variation, the beneficiary would need to survive seven years from the date of making the gift for it to be outside their estate for IHT purposes.
CGT can also be ‘read-back’ in this manner, ensuring that for CGT purposes, the beneficiary gifting the inherited asset is not treated as though they disposed of it, thereby avoiding any CGT on any gain made between inheriting the asset and gifting it.
A Deed of Variation can be read back for one tax and not the other, and there are situations where this is appropriate. Before making a variation, we always recommend seeking professional advice. It’s also important to note that a Deed of Variation doesn’t affect income tax or stamp duty land tax treatment.
What can’t a Deed of Variation do?
A Deed of Variation creates a tax fiction. In practical terms, it’s a beneficiary making a lifetime gift of inherited assets, but the Deed of Variation treats that gift for IHT/CGT purposes as though it was made by the deceased’s Will.
You may have heard a Deed of Variation referred to as a way of ‘rewriting’ the Will, but this isn’t strictly true. There are aspects of a will that a Deed of Variation cannot change, such as:
- Adding or removing executors, trustees, or guardians.
- Adding or removing administrative powers.
- Varying the interests of minor, unborn, or mentally incapable beneficiaries without court approval.
- Removing conditions from gifts so a beneficiary inherits without meeting the condition.
- Correcting errors in a defective will.
A Deed of Variation is unlikely to be effective in preventing the loss of means-tested benefits or avoiding care fees if the beneficiary making the variation is in residential care. In these circumstances, a variation to gift away an inheritance received is likely to be considered deliberate deprivation.
A Deed of Variation can be a powerful and flexible estate planning tool. While it can’t rewrite a Will entirely, it provides beneficiaries with the opportunity to redirect assets in a way that better reflects their family’s needs and circumstances, potentially making it more tax-effective. However, because each situation is unique and the rules around tax and estate planning are complex, professional advice is essential before making any changes.
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