What Is A Deed Of Variation?
In her latest Timms blog, Trainee Solicitor, Molly Evans explains what a Deed Of Variation is…
A Deed of Variation is a document that allows beneficiaries to change how assets are distributed under the terms of someone’s Will after they have died (or how assets pass under the intestacy laws if they have died without making a Will).
People usually use them to divert their interest in an estate to another individual, a charity or trust. Most commonly, a deed of variation is read back to the date of death so that it creates a gift from the person who has died, rather than from the beneficiary who is varying their interest.
What Are The Advantages Of Having A Deed Of Variation?
There are several reasons why a Deed of Variation could be advantageous. Sometimes, it can be an effective way of reducing the amount of Inheritance Tax (IHT) that is payable on an estate. IHT becomes payable on the value of someone’s estate that exceeds the nil rate bands (the most a person can leave tax free). Usually, IHT is payable at 40%, but if the beneficiaries agree to use a Deed of Variation to gift 10% of the estate to charity, this reduces the rate of IHT to 36% for the whole of the taxable estate.
When Is A Deed Of Variation Appropriate?
The following are some practical scenarios where a Deed of Variation may be appropriate:
- A father has four sons and leaves a Will that shares his estate only between three of them. The beneficiaries might believe that their sibling deserves an equal share of the estate. In this case, they could agree to sign a Deed of Variation to make provision for their sibling. This would also have the effect of reducing the potential for the disinherited son to bring a claim against the estate.
- A mother dies leaving her estate to her two children. Her children are well off themselves and would rather their mother’s estate be passed to their own children who would benefit most from immediate financial support. They agree to pass their inheritance straight to their own children using a Deed of Variation.
- A woman may have wanted to include provision for a close friend who had supported her throughout her lifetime, yet the Will was not amended prior to her death. The other beneficiaries may decide to recognise the intentions of the deceased and redirect a share of the estate to the friend.
Are Deeds Of Variations Tax Efficient?
Deeds of Variation can sometimes be a tax efficient way of gifting money that has been received via an inheritance.
An example of this would be if a client inherited £50,000 from their mother’s estate but they wished to gift this to their 21-year-old niece.
If they simply made the gift of £50,000 themselves then they would need to survive for 7 years to ensure that the value of the gift was outside of their own estate for inheritance tax purposes.
However, if they made the gift by way of a properly drafted Deed of Variation then the gift is read back as though it had been made directly from the client’s mother’s estate.
A Deed of Variation can also be beneficial for Capital Gains tax purposes.
What Are The Requirements For A Deed Of Variation?
For a Deed of Variation to be valid, it must be in writing and signed by the beneficiaries giving up their entitlement. If the purpose of the Deed of Variation is to mitigate tax then it must be made within two years from the date of death. It should also include reference to the Inheritance Tax Act 1984 and the Chargeable Gains Act 1992.
Do I Need A Deed Of Variation?
This very much depends on your individual circumstances and the wishes of any beneficiaries under the Will or laws of intestacy. Therefore, it is essential that you get advice from a legal professional.
If you would like further help with the issues raised above or any other matter relating to Wills, Probate and Estate Planning, please don’t hesitate to contact me at m.evans@timms-law.com or on 01332 364436. Alternatively, you can visit the Wills and Probate page of our website here.
February 2022