Post-death planning: How Deeds of Variation can reshape an estate

A Deed of Variation is a legal document that allows beneficiaries of a Will to change how an estate is distributed after someone has died. It can be a useful tool for families who wish to adjust the terms of a Will for practical, family, or tax reasons.

Normally, a person’s estate is distributed according to their Will (or the rules of intestacy if there is no Will). However, beneficiaries may decide that a different arrangement would be more appropriate. A Deed of Variation allows them to redirect all or part of their inheritance to another person or, for example, into a trust. To be effective for tax purposes, the deed must usually be completed within two years of the date of death and must be signed by all beneficiaries whose entitlement is affected

The main tax advantages relate to Inheritance Tax (IHT), because when certain conditions are met, the law treats the deceased as having made the gift. For example, assets can be redirected to a spouse, allowing the spouse exemption to apply, or to a charity, which is exempt from IHT. There may also be Capital Gains Tax advantages, as the variation can be treated as occurring at the value at the time of date of death (hence at no gain) rather than the value at the time of entering into the variation.

A common use of a Deed of Variation is “generation skipping.” For instance, a parent who inherits from a deceased relative may decide that the assets would be better passed directly to their own children (the deceased’s grandchildren). Without a variation, the parent would inherit the assets and could then make a gift to their children, but they would need to survive that gift by seven years for it to fall completely outside their estate for IHT purposes. By contrast, if the assets are redirected using a Deed of Variation, they are treated as passing directly from the deceased to the grandchildren, avoiding that additional step and potential tax exposure.

A Deed of Variation can also redirect assets into a trust rather than to an individual. This may be helpful where beneficiaries are young, financially inexperienced, or where asset protection is a concern. Trusts can also allow more structured long-term planning, although they have their own tax rules which must be considered.

In the past, there have been suggestions that the tax advantages of such variations could be removed, but this has not materialised so far. There are also legal constraints on how deeds of variation can be used. For example, a minor cannot legally consent to a variation, meaning any change affecting the minor’s entitlement will usually require court approval. This can increase both the cost and timescale involved, and there is no guarantee that approval will be granted by the court.

Therefore, while a Deed of Variation can sometimes be useful to “fix” issues after death and provide planning opportunities, it should not be relied upon. Careful lifetime planning and properly structured Wills remain the best way to manage estate planning outcomes.

Please get in touch by calling 01675 442 430 to discuss any of the issues raised above.

 

Meet the author: Vicki Bennett, Partner

 

This information does not represent legal or tax advice. Seek appropriate legal or tax advice about the topics covered, specific to individual circumstances, before taking or refraining from any action.