Client Guide: Deeds of variation
In this country an individual is free to make whatever provisions he or she wishes in their Will or indeed not to make a Will at all.
However, it is often desired when an individual has died to change the terms of their Will or the effect of the intestacy provisions (which apply when no Will has been made).
Provided that all of the beneficiaries affected by the proposed change are adult and in full agreement then a variation can be made. The document giving effect to the agreement is known as a 'deed of variation' or a ‘deed of family arrangement’.
Why make a deed of variation?
Variations can be made for a variety of reasons but these are some of the most common:
- to take advantage of favourable tax planning opportunities
- to update an outdated Will or to take into account changed circumstances
- to settle a dispute within the family about the terms of the Will
- to make alternative arrangements when a beneficiary simply does not wish to take up his inheritance
What are the tax planning opportunities?
A person who has inherited money or other assets is perfectly entitled to give the inheritance away just as any other asset can be given away. If such a gift is contemplated it is sensible to make it by means of a deed of variation. To be effective for tax purposes the deed has to be made within two years of the death of the individual concerned. This two-year period is strict and cannot be extended.
The taxation effects of a deed of variation can be briefly summarised as follows:
Inheritance Tax (IHT)
The provisions made in the deed of variation are treated as having been made by the person who died. If no deed of variation is signed and a beneficiary gives away part of what they would have received from the estate, they would normally be treated as having made a gift. This gift would form part of the beneficiary’s own estate for IHT purposes and they would generally need to survive seven years from the date of the gift for it to be tax-free. By signing a deed of variation, on the other hand, the gift is treated as having been made by the person who died and it does not affect the tax position of the beneficiary. However, full advantage can still be taken of the reliefs and allowances available to the person who died.
Capital Gains Tax (CGT)
For CGT purposes the gift is again treated as having been made by the person who died and not by the beneficiary. For example, if a beneficiary inherits some shares that go up in value after the date of death, and he or she wishes to give the shares away, by making the deed the shares are treated as having been given away by the person who died and no capital gain arises. However, care should be taken as it is not always advisable to use a deed of variation for CGT purposes especially if the shares have gone down in value and specific advice should be taken each time.
The beneficiary who receives income from the estate after the deed of variation is normally subject to income tax in the ordinary way but there are special rules for trusts and young children.
A word of caution
Although deeds of variation are clearly permitted within the Statute Law, the Inland Revenue does not automatically accept them as having the desired tax consequences. In particular, where unusual circumstances arise, such as two deaths in succession, they look more closely at the deeds. It is always necessary to look closely at the tax position for each specific case.
It should also be stressed that you cannot do anything in a deed of variation that will diminish the entitlement of someone who is under 18 or who does not agree to the proposal. The two-year time limit from the date of death for making a deed should also be remembered.