Deeds of Variation
1. What is a Deed of Variation?
A Deed of Variation can be used by beneficiaries to change entitlements under a Will or intestacy for tax purposes within two years of the date of death. For example, a Deed of Variation may be used in the case of jointly owned property, to divert the share of the deceased to someone other than the surviving joint owner.
There are many reasons why beneficiaries may wish to vary or redirect inheritances. The main reasons are:
- To save inheritance tax
- To alter the interests under a Will
- To redirect an asset held in a joint tenancy which would otherwise pass to the surviving joint tenant
- To provide for someone who has been omitted from a Will or who has not been given adequate financial provision in a Will
- To resolve any uncertainty or defect in a Will
The beneficiaries must be certain that they want to re-direct their inheritances as once they have done so, they cannot get them back. Children under the age of 18 cannot agree to a Deed of Variation, though in certain cases a court can be asked to approve any variation that affects them.
2. What can be varied?
The following benefits from an estate can be redirected by a deed of variation:
- A cash legacy
For example: "£50,000 to my daughter, Jane".
Jane can redirect the £50,000 cash legacy by means of a Deed of Variation to, e.g. her own children.
- A specific gift or asset
For example: "to my son John my stamp collection".
Peter can redirect this legacy by a Deed of Variation to, e.g. his son
- An absolute share of the residue
For example: "the residue of my estate to my children Jane and John in equal shares"
If John does not wish to receive his share of residue, he can pass this to someone else. For example, he could vary the will so that his half share of the residue will be held in trust for his own children until they reach a specified age.
- A share of an estate under the intestacy rules
If someone dies without making a will, the intestacy rules govern who will inherit the estate. The surviving spouse or any of the adult children who wish to pass on their share of the estate could do so by means of a Deed of Variation. For example, if the children felt that the surviving spouse was not sufficiently well provided for, they could increase what they receive from the estate.
- Joint property
Special rules apply if a property is held jointly. Married couples or partners often own assets in their joint names. When one joint owner dies the jointly owned assets usually pass automatically to the survivor. It is often possible for the survivor to redirect the inherited share of the joint assets by means of a Deed of Variation. It may be possible to pass on the deceased’s share of the jointly owned home in this way.
A Deed of Variation normally requires the consent of all beneficiaries who are interested in the property which is to be redirected. Problems are likely to arise if some beneficiaries are under 18 years of age.
3. Main requirements of a Deed of Variation
If a Deed of Variation is to take effect for the purposes of inheritance tax and/or capital gains tax, certain conditions must be satisfied. The main conditions are:
- The Deed must be completed within two years after death.
- An appropriate tax statement must be contained in the Deed.
- The Deed of Variation must be genuine and not a sham.
- No inducements or payment may pass between beneficiaries to induce them to sign the Deed of Variation. An exchange of inheritances by beneficiaries is permissible.
- It is not possible to have more than one Deed of Variation in relation to the same item of property. It is, however, possible to have more than one Deed of Variation in relation to the same Will or intestacy.
- A Deed of Variation can be affected even if the administration of the estate has been completed and the property has been distributed. It is also possible to affect a Deed of Variation before a grant of representation has been obtained.
4. Main Tax Consequences
Broadly, the main taxation consequences of a Deed of Variation are as follows:
- Inheritance Tax (IHT)
For IHT purposes, the variation will be treated as though it had been made by the deceased in his will and not as if it were a lifetime gift by the beneficiary. The beneficiary will not therefore use his own IHT exemptions or nil rate band in redirecting his inheritance.
- Capital Gains Tax (CGT)
The alterations made by a Deed of Variation do not constitute a disposal for CGT purposes and are deemed to have been made by the deceased person for most but not for all CGT purposes. Any person who takes assets under the Deed of Variation will acquire those assets as "legatee" with the benefit of the personal representatives' acquisition cost (usually the market value at the date of death).
- Income Tax
There is no concession for income tax similar to the favourable concessions for IHT and CGT. A Deed of Variation is not retrospective to the date of death for income tax purposes and is only effective from the date of its execution.
5. Conclusion
A Deed of Variation can present a major tax planning opportunity. It should be considered in virtually all cases. For example, a surviving spouse may wish to redirect part of his or her inheritance to the children in order to take advantage of the IHT nil rate band for the estate.
Specific professional advice should be obtained before a Deed of Variation is used in any particular case.
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