What is a Deed of Variation?

A Deed of Variation is a document that allows the beneficiaries named in a Will to make changes to the distribution of the deceased person’s estate.

Importantly, it allows existing beneficiaries to:

• add new beneficiaries to an estate

• alter the distribution of an estate between themselves.

People may want to make changes for several reasons.

When would a Deed of Variation be used?

Here are some examples of situations where a Deed of Variation might be used:

• A father has five children, but he leaves a Will that shares the estate between only three of them. The three beneficiaries believe that the two siblings who have been left nothing deserve a share of the estate. They agree to use a Deed of Variation so their brother and sister are included as beneficiaries and also receive a share.

• A mother dies, leaving a Will that shares her estate equally between her two children. In the last year of her life, she was cared for by one of her closest friends. The children agree that their mother's friend should be given some money from the estate. They use a Deed of Variation to give her a legacy of £15,000.

• A stepmother dies, leaving her estate equally divided between her two stepdaughters. One of the stepdaughters is far wealthier but, sadly, is seriously ill. Inheriting from her stepmother would increase the potential tax liability on her own estate, and she doesn’t expect to live for another seven years. The sisters agree the less affluent of them should have a larger share of the estate, and they agree a 90/10 distribution.

What are the advantages of a Deed of Variation

The primary advantage of a Deed of Variation is to give existing beneficiaries the ability to change how an estate is distributed. Another valuable benefit is that a Deed of Variation can also be used to reduce any tax bill.

Can a Deed of Variation reduce the amount of Inheritance Tax payable on an estate?

A Deed of Variation can effectively reduce the amount of Inheritance Tax (IHT) payable on an estate. IHT is payable at 40% on an estate worth more than £325,000. So, if beneficiaries agree to gift 10% of the estate to charity, this would reduce the amount of IHT payable to 36%.

Adding a new beneficiary allows the executors 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 and can be a tax-efficient way of gifting money.

Why would I divert my inheritance to another person?

Imagine you are told you will inherit £25,000 from your aunt. If you receive this money and then gift it to someone else, you would have to live for seven years for the gift to fall out of your estate for inheritance tax purposes (assuming your estate is taxable).

If you don’t need the inheritance, you might decide to pass your gift to your children. If you ask the executors to vary the Will to include your son or daughter as a new beneficiary of your aunt’s estate, 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 potential to reduce Capital Gains Tax (CGT). However, given the complex nature of these arrangements, we strongly recommend you seek expert advice for 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, it must be made within two years of the deceased person’s death. To qualify for any potential tax relief or saving, HMRC requires that any Deed of Variation must be:

• In writing

• Signed by all beneficiaries who would lose out because of any changes

• State clearly 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 any changes

• No existing beneficiary who adjusts their share can be compensated

• Variations must not be made based on payments from someone outside the estate.

If a Deed of Variation will affect children (or unborn children), Court approval will be needed.

Are there any disadvantages to a Deed of Variation?

A Deed of Variation is a permanent change to the deceased person’s Will. You would no longer have access to the gift or asset given to another beneficiary.

What if there’s no Will?

If the deceased person didn’t make a Will and you are a beneficiary under intestacy rules, it is possible to use a Deed of Variation. Expert advice will be needed.

Do I need a legal professional to make a Deed of Variation?

A Deed of Variation can give you more control over how an estate is distributed and can bring significant tax benefits, so it’s essential to seek expert advice. Our recommended probate partner can help you administer your loved one’s Will and advise you about potential tax savings or if there could be disadvantages to your proposal.

Get in touch today if you’d like advice on any matter relating to Wills and Lasting Powers of Attorney.

Disclaimer: This article contains general information only and does not constitute legal advice.