Deeds of variation — a quick guide

What is a deed of variation?

A deed of variation is a legal document that allows a beneficiary of a deceased’s estate to change a Will or, in the instance there is no Will, change how the intestacy rules operate and apply to the estate. It can be used to alter the distribution of assets, add beneficiaries, or make other changes to Will or 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:

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

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 the estate.

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. 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.

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

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. 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, however, any changes must be made within two years of the person’s death.

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 therefore that you take advice on a deed of variation and it is signed, 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.