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What is a Deed of Variation?

What is a Deed of Variation?


Expert view

 

A deed of variation allows you to make changes to an inheritance you have received. This may seem like a strange thing to want to do, but there are some very good reasons to do this.

If you have inherited from someone who has died, you can pass some or all of it to someone else. As long as certain rules are followed, the gift will be treated, as if it had been made by the person who died rather than by you. This can be beneficial for tax purposes, such as inheritance or capital gains tax.
 
You can make a deed of variation if there was a will and you can still make changes to an inheritance if there was no will. Entitlement to an inheritance can come from:

  • a will
  • when someone dies without a will and their estate is distributed in accordance with the rules of intestacy (statutory rules detailing who inherits from an estate)
  • Any assets you owned jointly with the person who died

You can make to deed of variation to redirect your inheritance to someone else in all of these circumstances.

Why Should I make a Deed of Variation?

There are many reasons why you may want to give your inheritance to someone else. Some of these are:

  • To ‘skip’ a generation and pass on the gift to your children or grandchildren
  • To provide for friends or family who have a greater need than you do
  • To reduce the amount of tax payable by giving your inheritance to someone who is exempt from paying inheritance tax, such as a charity
  • To reduce the size of your own estate, for your own inheritance tax planning
  • To redirect any tax free inheritance to your children from a spouse or civil partner
  • To preserve the inheritance tax free allowance of the person who died.

By making a deed of variation, you can have the benefit of hindsight that the person who died did not have and you can consider the needs of your friends and family, which may have changed since the will was made.

A deed of variation also gives you an opportunity to retrospectively tax plan. Any changes in tax reliefs and exemptions can be taken in to account and as long as the variation takes place within two years of the person’s death, the gift is treated as being made by the person who has died rather than by you.

It can be difficult to picture how a deed of variation works, so here is an example:

  1. John dies and leaves £900,000 cash to his daughter Sophie under his will.
  2. Sophie redirects her inheritance of £900,000 using a deed of variation to her son, Samuel.
  3. The inheritance tax is paid by Johns’ estate.

If Sophie simply ‘gave’ the £900,000 she inherited from John’s estate to Samuel, this would be deemed to be a ‘potentially exempt transfer’ (PET). Provided Sophie survives seven years from the date of making this PET, this gift will fall outside of her estate when calculating any inheritance tax due on her death.

If Sophie died before the seven years was up, the value of the PET would be taken into account when calculating any inheritance tax due on Sophie’s estate. In this scenario, tax would have to be paid on John and Sophie’s estate – once when the £900,000 was transferred from John’s estate to Sophie, and again if Sophie dies within seven year of giving the money to Samuel. 

Such a situation can be avoided by preparing a deed of variation. The deed would mean that the gift of £900,000 would bypass Sophie entirely and it would be as if Samuel had received the £900,000 from John’s will.

Tax implications are just one of the factors that need to be considered when making a deed of variation and getting specialist legal advice is vital to make sure that the deed of variation reflects your wishes.

Do I have to accept a gift?

If you are offered a gift from someone’s estate but you do not want it, you can simply refuse to accept it, or “disclaim” it. If you do refuse it, you cannot choose who should receive the gift instead. The will or the rules of intestacy will determine who inherits the gift instead of you. 

If you would like to discuss how a deed of variation can help you or your family, please contact us on 0117 9264121 or make a free enquiry online.