Financial Planning: Can a Deed of Variation Help Minimise Taxation on Estates?

Some interesting advice for those with assets and wealth looking to plan for the future. 

Frances Brickwood, Principal Associate and Private Wealth expert at Weightmans, explores whether a deed of variation could be a viable option for your family to consider to avoid unwanted tax implications.

A deed of variation could be a more tax-efficient way to distribute a deceased’s estate

A deed of variation is a formal legal document that allows a beneficiary of a deceased’s estate to give away part or all of their inheritance under a will or intestacy in a tax-efficient manner. It can be used to alter the distribution of assets, add beneficiaries, or make other changes to a deceased’s Will or the intestacy rules. This must be done within two years of a person’s passing.

There are many reasons why you might want to enter into a deed of variation, but the main reasons are:

• If there is a more tax-efficient way to distribute the deceased’s estate and you want to make use of it.

• If the Will or intestacy does not make provision for people that you believe should have some benefit from the estate (e.g. grandchildren born after the date that a Will was written or a partner or cohabitee who has no automatic entitlement under intestacy rules).

• If the beneficiaries of an estate collectively want to ‘even things out’ for all beneficiaries, perhaps if a child has been omitted or has been left a smaller share of the estate than others.

• You want to give away all or part of your inheritance to someone else tax efficiently.

Deeds of variation are commonly used to reduce inheritance tax

Deeds of variation can be useful for many reasons, but they are most commonly used to reduce inheritance tax and/or capital gains tax (CGT). You can adjust the distribution of someone’s estate to utilise any available tax reliefs that have not been utilised, and if the correct declarations are included in the deed of variation, the gift made under it will be treated by HMRC as a gift from the deceased rather than the beneficiary who inherited.

This will avoid the need for an original beneficiary to have to survive the date of the gift by seven years for it to fall outside their estate for inheritance tax purposes. If you want to use a deed of variation to help reduce tax, it’s essential to get expert legal advice to make sure you’re doing what’s best for you and/or the estate.

Things to consider if you’re thinking about getting a deed of variation

While it can seem like a good option, it’s best to note these restrictions if you are considering getting one.

• You can only vary the same asset once, and it is irrevocable once signed.

• You cannot vary a minor’s interest in an estate without a court order.

• You cannot use a deed of variation to ring-fence/shelter assets from creditors.

• You cannot use a deed of variation to vary someone’s interest in an estate if they lack capacity to understand and consent to the variation.

• You only have two years from the date of the deceased’s death to make use of the tax benefits of a deed of variation.

• You cannot formally vary any part of your inheritance if you have already given it away.

• You cannot vary the appointment of executors or guardians appointed in a Will.

Frances Brickwood comments on the growing search interest of deeds of variation and what to look out for:

“Getting a deed of variation can benefit many family circumstances, to make sure it is the best option for your family and the estate of the loved one that has passed away, it’s best to seek professional advice from a lawyer to help answer any questions and get one written up, as all cases are different.

One thing to remember when it comes to gifting inheritance is that, unfortunately, the IHT and CGT elections in a deed of variation will be ineffective if the deed has been signed after the gift has already been made. It is crucial to take advice on a deed of variation and make sure that it is signed by all relevant parties before the gift is made.

If you have made an outright gift to a taxable beneficiary (in which you have not retained a benefit) before signing a deed of variation, it will be treated as a Potentially Exempt Transfer (PET) for Inheritance Tax purposes. You would have to survive the date of the PET by 7 years for it to fall outside of your own estate for Inheritance Tax purposes.”