Deeds of variation – what you need to know about their tax advantages and implications

Did you know that deeds of variation could reduce your Inheritance Tax (IHT) liability?

Find out more about deeds of variation and their tax implications.

What is a deed of variation and when might it be required?

A deed of variation is a legal document that allows you to alter the distribution of assets, add beneficiaries, or make other changes to Will or Intestacy rules.

The deed must be signed by all parties involved and witnessed for it to be legally binding.

Any adult individual who has mental capacity and is entitled to benefit from a deceased person’s estate is free to inherit and give away their inheritance to whoever they choose.

However, by making a deed of variation, the law allows the gift to be treated as if it was made by the deceased person directly rather than the intended beneficiary’s estate.

This could reduce IHT and Capital Gains Tax (CGT) liabilities.

• Transferring some of your entitlement from one beneficiary to another can reduce your personal IHT liability.
• A qualifying deed of variation or disclaimer means there will be no disposal by the original beneficiary for CGT purposes, and the new beneficiaries will be treated as if they acquired them from the deceased at the date of their death at probate value.

Deeds of variation can maximise the availability of tax exemptions and reliefs by rewriting who inherits what and how.

Why might someone want a variation?

There are several reasons why a variation might be used post-death.

• A beneficiary already has a potential IHT liability and wishes to pass their inheritance to the next generation, so they do not exacerbate their tax position.
• The original distribution may not make use of the various IHT exemptions and allowances that are available.
• There may be a perceived unfairness in the distribution of assets that a beneficiary wishes to correct (for example, siblings who are not receiving an equal share of the estate).
• A beneficiary who simply does not want the asset bequeathed to them and would like to give it away without being treated from a tax point of view as if they had made the gift.
• Beneficiaries may wish to gift something to a charity to reflect the wishes of the deceased and reduce the rate of IHT.

Deeds of variation can even enable original beneficiaries to pass on their inheritance through the creation of discretionary trusts and life interests.

What to be aware of

Deeds of variation can be very useful and flexible tax planning tools to move wealth to the next generation in the family and minimise liabilities.

However, there are some things to be aware of when putting deeds of variation in place.

It is important that the deed is drafted correctly to meet all legal requirements and avoid unintended consequences.

If the deed of variation is being implemented for tax planning purposes regarding the effectiveness for IHT and CGT, it must contain clear statements showing this intent.

Only individuals who are of full age and capacity can consent to a deed of variation.

In cases where the variation affects to the interests of a minor or a person lacking capacity, an application can be made to the courts for approval.

IHT tax planning

Deeds of variation can provide many IHT benefits. However, it is vital to make that all tax implications are considered carefully, particularly where trusts are involved, prior to implementing a variation.

Our team can help you understand the tax implications and how deeds of variation can reduce IHT liabilities.

Contact us today for expert guidance on IHT tax planning and deeds of variation.