What is a Deed of Variation?
A Deed of Variation is a legal document that can be used to allow a beneficiary to redirect part or all of their inheritance after someone's death. It is not a re-writing of the deceased's Will or a change to the intestacy rules because although a Deed can alter how assets are disposed of, the beneficiary must have had an interest in the first place.
Why would a Deed of Variation be made?
There are various reasons why making a Deed of Variation might be appropriate, which might include:
- Passing Assets on to Children
If you make a gift in your lifetime this is known as a PET (Potentially Exempt Transfer) and in order for the amount to fall out of account in your own estate for Inheritance Tax purposes you need to survive seven years. By redirecting the asset under a Deed of Variation the gift has not been made from you but has come from the deceased's estate, hence avoiding potential Inheritance Tax in your own estate.
- Financial Fairness
A beneficiary may feel they can make the terms of the Will fairer. An example might be where a Will was made some time before death and does not include children born after the date it was made or does not take account of a current long-standing partner. Alternatively a beneficiary may be financially secure and does not feel the distribution under the Will is appropriate or feels that someone has been unfairly left out of the Will and wishes to redirect part or all of their inheritance to them.
- Retrospective Tax Planning
A beneficiary might wish to redirect their inheritance to charity which can be effective in reducing the Inheritance Tax due in an estate because the amount redirected would then attract charity exemption for Inheritance Tax purposes. If the gift the charity is 10% or more of the deceased's net estate this can also mean that a reduced rate of Inheritance Tax of 36% rather than 40% can apply to the estate.
When is a Deed of Variation not possible?
A Deed of Variation cannot be used to re-direct assets away from a creditor or where the original beneficiary is in receipt of means-tested benefits. A Deed of Variation cannot be made on behalf of someone who lacks mental capacity, or a beneficiary who is under 18, without the approval of the Court.
What assets can be redirected?
Anything that the beneficiary receives under the Will, which might include land, cash, shareholdings, or a share of the estate.
Who can make a Deed of Variation?
The Deed of Variation is made by the beneficiary who wishes to redirect some or all of their inheritance. More than one beneficiary can redirect their share under the same Deed of Variation, or more than one Deed of Variation can be prepared (particularly if the original beneficiary wishes their redirection to remain private). You cannot make a further Deed of Variation in relation to the same asset(s).
If the Deed of Variation results in additional Inheritance Tax being payable then the personal representative(s) must also sign the Deed. Generally it is good practice for the personal representatives to always sign the Deed so that they know how to correctly administer the estate in light of it.
When can you make a Deed of Variation?
At any point during the administration of the estate, before or after the Grant has been issued, or even where no Grant is required. However, to work for tax purposes it must be completed within 2 years of the date of death.
Who pays for a deed of variation?
The beneficiary who is redirecting their share should generally pay the legal costs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.