What is a Deed of Variation?
A Deed of Variation is a legal document that changes how assets in an Estate are distributed after someone’s death. The original inheritance could be received from a Will or via an intestacy (when a person dies without a Will).
If key conditions (see below) are met, the original gift can be written back to the date of death for either or both Inheritance Tax and Capital Gains Tax so that it is deemed to be made by the deceased. This means that it will not be treated as a gift for Inheritance Tax purposes. In addition, for Capital Gains Tax the new beneficiary will take a base cost of the value of the asset in question at the date of death.
What are typical reasons for using a Deed of Variation?
There are many occasions that a Deed of Variation could be useful for tax or estate planning reasons.
A typical example is a parent wishing to re-direct all or part of an inheritance to children. If the tax conditions are met, this has the advantage that the gift would be treated as received by the child and so would not be charged to Inheritance Tax on the parent’s death. A Deed of Variation could also be used to provide for the redirected assets to be held on trust for the next generation, to benefit from the flexibility that this provides in terms of succession planning.
Alternatively, a beneficiary may wish to re-direct assets to charity which, as well as supporting a good cause, could reduce the amount of Inheritance Tax in the Estate.
Another example when a Deed of Variation could be useful, can be if someone was missed out as a beneficiary of the Will and one or more existing beneficiaries want that person to benefit from the Estate. This can be used to implement solutions to family disputes around how an Estate has been divided and avoid the costs associated with a claim against the Estate.
Who needs to be notified?
A Deed of Variation does not need to be officially registered. However, if the amount of Inheritance Tax changes as a result of the Variation HMRC will need to be notified and any additional tax paid. This could include a situation where assets are re-directed to a charity qualifying for an Inheritance Tax exemption, or away from a surviving spouse (usually an exempt beneficiary for Inheritance Tax) to a taxable beneficiary.
There are various conditions to qualify for retrospective tax treatment for Inheritance Tax and Capital Gains Tax which include:
- The Variation must be made in writing (usually by deed) within a strict two-year time limit from the date of death.
A beneficiary can only re-direct an asset / interest in the Estate once, so it is important that a beneficiary is comfortable giving away the asset in question.
The Variation must include an election for retrospective treatment for Inheritance Tax and / or Capital Gains Tax.
The person varying a gift cannot receive any consideration in money or money’s worth for making the Variation.
Tips and traps
- A Deed of Variation can be a useful option for beneficiaries of an Estate for asset protection or estate planning reasons. However, it is important that careful consideration is given to the tax position. For example, if the value of an asset has decreased since the date of death, it may be more beneficial not to elect for “writing back” for Capital Gains Tax purposes, so that the loss can be set against other gains made by the Personal Representatives.
- No writing back is available for Income Tax purposes.
A Deed of Variation can sever a joint tenancy, so that an interest or part an interest in property that would otherwise pass automatically to any surviving joint owner (and not under a Will or intestacy) can be re-directed to someone else.
In cross-border Estates the international legal and tax implications should be considered.
If you require further information about anything covered in this briefing, please contact Rebecca Peet or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, April 2023