What is a deed of variation, and can it reduce inheritance tax?
A deed of variation, also known as a deed of family arrangement, is a 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.
Why would you want a Deed of Variation?
There are a number of reasons why a deed of variation 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 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 does 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.
A deed of variation can be signed before or after probate granted. Only beneficiaries who are over 18 years of age and have full mental capacity can agree to a deed of variation. If the beneficiary 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 deed of variation 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.