Learn how a Deed of Variation lets families adjust inheritances, reduce inheritance tax (IHT), and create fairer outcomes after a loved one’s death.
When a loved one passes away, their will can sometimes leave behind more questions than answers. Maybe the inheritance feels unfair, family members have been left out, or the distribution creates an unpalatable IHT bill that could have been avoided. What many people don’t realise is that it’s often possible to make changes to an inheritance after death.
Enter the Deed of Variation. This is a powerful tool that allows beneficiaries of an estate to alter the way assets are passed on. Whether it’s redirecting part of an inheritance to children, supporting a charity, or passing 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 whether inherited via a Will or through intestacy. It can be used to alter the distribution of any assets, including personal possessions, money, and shares of residue.
Despite the name it 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’.
For the variation to be valid for tax purposes, it must be in writing, it must include the required statutory declarations, it must 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.
Why make a Deed of Variation?
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 are:
- To provide for others who are in greater need of funds.
- Make a charitable donation.
- Create a new trust or make an addition to an existing one.
- Make use of a more tax efficient way to distribute the estate and save IHT and/or Capital Gains Tax (CGT).
- Make a fairer distribution between beneficiaries.
- Provide for someone who the Will or intestacy failed to make provision for and who may seek to bring a claim against the estate.
How can it save tax?
It is common for a Deed of Variation to be used to achieve IHT savings. This may be because the way the deceased’s estate was distributed was not very IHT effective, so the beneficiary wants to reduce the IHT payable on the deceased’s estate. It may be because the beneficiary themselves is already well-off and wishes to pass their inheritance to the next generation avoiding inheritance taxes of their own.
Take for example a married person who has died intestate (without a valid Will). As a result of the intestacy rules their surviving spouse only inherits a portion of their estate and the rest passes to their adult son. If the value of their estate is large enough that what passes to the son suffers IHT, a Deed of Variation can be used to avoid this so long as the son agrees. The son can vary his inheritance to redirect it all to the surviving parent, now avoiding any IHT on the deceased’s estate as they will benefit from the spouse exemption.
A further benefit for the beneficiary making the variation is that because the Deed of Variation treats the gift they make as though it was made by the deceased instead, they avoid any lifetime IHT issues. Without the Deed of Variation, they would need to survive 7 years from the date of making the gift for it to be outside of their estate for IHT.
CGT can also be ‘read-back’ in this way so that for CGT purposes the beneficiary gifting the inherited asset is not treated as though they disposed of it, avoiding any CGT on any gain made between inheriting the asset and gifting it.
It is possible for a Deed of Variation to be read back for one tax and not the other and there can be situations where this is appropriate. Before making a variation we would always recommend that professional advice is sought. It is also important to note that a Deed of Variation does not have any effect on 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 is a beneficiary making a lifetime gift of the assets they have inherited but having the Deed of Variation treat that gift for IHT/CGT purposes as though the gift was made by the deceased’s Will.
You may have heard a Deed of Variation referred to as a way of ‘rewriting’ the Will. This isn’t strictly true, so there are aspects of a will that a Deed of Variation cannot change. It cannot:
- Add or remove executors, trustees, or guardians.
- Add or remove administrative powers.
- Vary the interests of minor, unborn, or mentally incapable beneficiaries without court approval.
- Remove conditions from gifts so a beneficiary inherits without meeting the condition.
- Correct errors in a defective will.
A Deed of Variation is unlikely to be effective to prevent the loss of means tested benefits that the beneficiary is in receipt of or avoid care fees if the beneficiary making the variation is in residential care. A variation to gift away an inheritance received is likely to be considered deliberate deprivation in these circumstances.
A Deed of Variation can be a powerful and flexible estate planning tool. While it cannot 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 and may be 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. We can help you find a trusted SWW Member in your area who can advise you on whether a Deed of Variation is right for you and make sure all the necessary rules are complied with for you variation to be effective.
