Deeds of variation — a quick guide

If you have inherited money or property under the Will of a loved one, you can redirect your entitlement to someone else by executing a formal “deed of variation”. You can also vary any entitlement you may have received under an intestacy (where someone has died without a Will). 

What is a deed of variation?

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.

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

• 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 an intestacy).
• 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. 

How does a deed of variation work?

The variation document allows you to change the way your inheritance (or part of it) is distributed by re-directing it outright to other beneficiaries or into a trust. For it to be effective for tax planning purposes, the correct declarations would need to be included, and it would have to be signed within two years of the deceased’s death. 

A deed of variation does not have to be drafted by solicitor but it is important to consult a legal expert when creating a variation so that it complies with all legal requirements and is effective. 

What are the main advantages of preparing a deed of variation?

Deeds of variation can be useful for many different reasons but they are most commonly used as a mechanism to reduce inheritance tax and/or capital gains tax (CGT).

You can adjust the distribution of someone’s estate to make use of 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.

Main disadvantages of a deed of variation

• You can only vary the same asset once and it is irrevocable once signed. Professional advice should be sought to avoid errors and/or unintended consequences.
• 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.

What changes can I make under a deed of variation?

Whilst you can only vary your own inheritance, deeds of variation can be used to change the distribution of an entire estate to benefit everyone provided the consent of all beneficiaries can be obtained. If that is the case, all the beneficiaries of an estate might decide collectively how that estate should be varied and enter into the same deed of variation.

The provisions of the variation can be tailored to meet your needs and requirements and can be as simple or complex as you need them to be. You might want to:

• Redirect part of your inheritance to beneficiaries of your choice;
• Make a gift to charity;
• Give away your whole entitlement; or
• Set up a trust.

You can enter into more than one deed of variation but each variation must relate to a different part of your entitlement.

What do I need to consider when making a deed of variation?

If you’re trying to work out the best way to structure a deed of variation we would recommend taking professional advice. It is crucial for the provisions of the deed of variation to achieve your goals and the last thing you want is for the variation to have unintended consequences for you or the other beneficiaries of the estate.

It is important to consider the effect of the deed of variation on your own circumstances as well as the estate as a whole. If a variation results in an additional tax liability for the estate for example, the Personal Representatives (Executor or Administrator) of the estate will need to be included as parties to the deed and provide their consent to the variation for it to be effective.

You can enter into a variation before or after a Personal Representative gets the ‘Grant of Representation’ (Probate) to start administering the estate but for tax reasons, the variation must be made within two years of the person’s death.

How long does a deed of variation take to prepare?

Usually, it will take between two and four weeks for a solicitor to prepare a deed of variation provided that they have received clear instructions, and all relevant parties agree to it. As previously stated, if court approval is required then this can cause significant delays to the process, and it is likely to take a number of months to conclude. Obtaining robust professional advice as early as possible within the two year window from date of death will be critical if any such court approval is required. 

What is the difference between a deed of variation and a disclaimer?

If you have inherited property or assets from an estate which you do not want, you can disclaim those assets by signing a formal deed of disclaimer. Unlike a deed of variation, which re-directs your inheritance to a person/charity of your choice, under a disclaimer, you are simply declining to accept your inheritance.

What if I have already given inherited assets away to a beneficiary before I have signed a deed of variation?

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 (which you have not retained a benefit in) 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.