What is a deed of variation, and can it reduce inheritance tax?
When someone dies their estate must be distributed in accordance with their Will or if they do not have a Will in accordance with the Rules of Intestacy.
A deed of variation, also known as a deed of family arrangement, is a legal document which varies a Will or the Rules of Intestacy after someone has died. They are used by a beneficiary who wishes to redirect all or some of their inheritance to another person.
Deed of variation
In a deed of variation, the original beneficiary names someone else to have their share of the deceased person’s estate. It does not have to be their entire portion, it could be just a part of it. The deed does not change the terms of the Will, but it does change how it is administered.
Why would you want a Deed of Variation?
There are a number of reasons why the deed may be necessary:
- To clear up any ambiguities in the Will;
- To balance distribution between the beneficiaries;
- To provide for someone who was omitted from the terms of the Will;
- Or to be tax efficient and reduce inheritance tax liability.
If someone has received an inheritance which they intend to immediately pass on to another person, for example to their child, a deed of variation will save the extra 40% Inheritance Tax which may be applied if they died within seven years of making the gift or if they left the gift under the terms of their own Will.
How do tax relief and the Deed of Variation work?
To benefit from tax relief, an accurate tax declaration must be included in the terms of the deed of variation and it must be signed within two years of the date of death.
The deed can be signed before or after probate is granted. Only beneficiaries of the deceased person who are over 18 years of age and have full mental capacity can agree to a deed. If the beneficiary of the deceased’s estate is under 18 or lacks mental capacity the court must consent to the variation and will only do so if it is deemed to be in the beneficiary’s best interests.
A deed of variation cannot be used to avoid creditors or to retain means-tested benefits.
A beneficiary cannot receive any financial inducements to sign the deed, if they do the deed will not be effective for tax purposes.
No second chances
Once a disposition has been varied (once the legal document has been signed) it cannot be varied again, there is no second bite of the cherry.
It is therefore extremely important the deed is drafted correctly as it cannot be changed or rectified once signed.
If you are a beneficiary and wish to change the terms of a Will or Rules of Intestacy, please contact our Wills and Probate team on 01376 578280 or email bryony.wilmshurst@cunningtons.co.uk
Find out more about our Wills and Probate solicitors in Braintree, Brighton, Chelmsford, Croydon, Hornchurch, Solihull and Wickford.
FREQUENTLY ASKED QUESTIONS
The following are common questions we get asked about Deeds of Variation. If you cannot find the answer here, please contact us for an answer.
Can a deed of variation be challenged?
The beneficiaries who are giving up a share of the estate must agree to the terms of the Deed of Variation and sign the Deed, they must agree to varying what they are due to receive.
If the beneficiary who is giving up a part of their entitlement is doing so in order to retain their entitlement to means-tested benefits, or to put the funds beyond the reach of creditors or a spouse in divorce proceedings, then the terms of the Deed of Variation are likely to be disregarded by the Department of Work and Pensions or the Courts, and the original beneficiary will be treated as though they still have the funds.
Can a deed of variation be done after probate?
Yes, it can. However the deed must be enacted within two years of the date of death to be effective for tax purposes and it must be done before the original beneficiary receives their entitlement.
Do you need a solicitor to make a deed of variation?
No, it’s not a legal requirement to use a Solicitor to draw up a deed of variation, but it does need to be correctly drafted to be valid and effective for tax purposes.
If the deed is signed and then later found to be invalid, contain an error or be ineffective for tax purposes, it cannot be rectified. Once it has been signed, a deed of variation cannot be amended.