A Deed of Variation is a document that allows beneficiaries named in a Will to make changes to the distribution of an estate.
Importantly, it allows existing beneficiaries to add new beneficiaries to an estate. It also allows them to alter the distribution of an estate between themselves. People may want to do these things for a number of reasons, but the following scenarios are good examples of why a Deed of Variation might be needed.
• A mother has four children, but she leaves a Will that shares the estate between only three of them. The three beneficiaries believe that the sibling who has been left nothing deserves an equal share of the estate. They agree to use a Deed of Variation to make the sibling an equal beneficiary.
• A man dies, leaving a Will that shares his estate equally between his two children. In the last year of his life, he was cared for by a close friend. The two children agree that the friend should be given some money from the man’s estate. They use a Deed of Variation to give the friend £20,000.
• A woman dies, leaving her estate to be divided equally to her three children. Two of the children are wealthier than the third. They agree to give the less wealthy sibling half of the estate and split the remaining share between them.
As you can see, the primary advantage of a Deed of Variation is that it gives existing beneficiaries the ability to change how an estate is distributed. However, a Deed of Variation can also result in another major benefit: a lower tax bill.
Inheritance Tax and Deeds of Variation
A Deed of Variation can sometimes be an effective way of reducing the amount of Inheritance Tax (IHT) payable on an estate. IHT is normally payable at 40% on estates worth more than £325,000. Therefore, if beneficiaries agreed to gift 10% of the estate to charity, it would reduce the amount of IHT payable to 36%.
Similarly, creating a new beneficiary allows you to redirect all or part of a legacy to another person (such as an adult child). This can reduce the amount of IHT payable on this portion of an estate.
Doing this can also be a tax efficient way of gifting money. For example, imagine you inherit £30,000 from an estate and you want to give the whole amount to your 25-year-old daughter. If you took the money from the estate and then gifted it to your daughter, you would have to live for seven years before that money fell out of your own estate for IHT purposes. However, if you make a Deed of Variation that makes your daughter a new beneficiary of the original estate, then the ‘seven-year rule’ no longer applies and the money is no longer potentially subject to IHT.
There are many other potential tax advantages to using a Deed of Variation, including the possibility of reducing Capital Gains Tax. However, given the complex nature of these arrangements, we strongly recommend you talk to a member of our specialist Wills, Trusts and Probate team for expert advice that is tailored to your circumstances.
When can I make a Deed of Variation?
You can make a Deed of Variation before or after a grant probate is issued. If you are making it for IHT or CGT reasons, however, then it must be made within two years of the deceased person’s death. In order for it to be valid in the eyes of HMRC, any Deed of Variation must also be:
• In writing
• Signed by all beneficiaries who would lose out because of the change(s)
• Clearly state which elements of the estate are being changed and who will benefit.
Other requirements include:
• All beneficiaries must be aged 18 or over
• All beneficiaries must agree to the changes
• No existing beneficiary who adjusts their share can be compensated
• Variations must not be made based on payments from someone outside the estate.
In addition, it’s important to note that if a Deed of Variation will affect children (or unborn children), you need to get Court approval. Finally, if you are a beneficiary under intestacy rules (i.e. the deceased didn’t make a Will), it is possible to use a Deed of Variation. We can help you understand the rules and restrictions that apply to this circumstance.
Do I need a Deed of Variation?
The answer to this very much depends on your circumstances and wishes, as well as those of any other beneficiaries of a Will. While a Deed of Variation can give you more control over how an estate is distributed and can bring you significant tax benefits, it’s essential to get expert advice.
If you’d like advice on this, or any other matter relating to Wills, Probate and estate planning, please get in touch with us today.