Deed of variation are documents that are useful for both inheritance tax (IHT) and capital gains tax (CGT) planning and are utilised by beneficiaries of a deceased’s estate. They will often be used either to assist with mitigation for the beneficiaries or for the deceased’s estate. This week’s article will explain what a deed of variation is and what they could be used for.
What is a deed of variation?
A deed of variation is a document used by beneficiaries of a deceased’s estate who wish to give up their gift from the deceased and transfer it to another person. Providing the conditions of the deed of variation are met (the main one being that the variation is made within two years of death), it will be treated for IHT and some CGT purposes as if the deceased had made the gift to the new beneficiaries.
Misunderstandings of a deed of variation
It is important to note that a deed of variation is not a redrafting of a deceased’s will or amendment of the intestacy rules where there is no will. Whilst it is used to change the destination of recently inherited assets, the variation does not retrospectively amend the will. The variation simply amends the IHT and CGT implications so that it is treated as if the deceased had gifted to the new beneficiaries. For all other purposes it is still treated as if the original beneficiary had inherited from the deceased and then gifted to the new beneficiaries.
Uses of a deed of variation
The main benefit in using a deed of variation is it allows a beneficiary to transfer their inheritance or part of their inheritance to another without being concerned of the IHT and CGT implications of the gift. They do not need to be concerned about the gift affecting their own tax allowances.
There may also be a number of IHT advantages to the deceased’s estate in using a deed of variation which could lead to the estate incurring less IHT.
A deed of variation could be used to transfer assets from a non-exempt beneficiary to an exempt beneficiary (i.e. a spouse/civil partner or charity) so that the gift is IHT exempt. Transferring to a charity may also lead to the 36% rate of IHT applying to the estate if the conditions are complied with.
Where spouse/civil partner has inherited assets that qualify for business property relief or agricultural property relief, they may wish to transfer those assets to a non-exempt beneficiary or to a trust to ensure that relief is not wasted.
A spouse/civil partner may wish to consider transferring assets to a non-exempt beneficiary to use some or all of the deceased’s NRB. This may be particularly useful where the deceased or surviving spouse/civil partner is a widow with a transferable NRB available from the previous spouse.
Beneficiaries may wish to transfer the deceased’s residence to descendants to utilise the deceased’s RNRB.
There may also be reasons for a beneficiary to transfer their inheritance to trust. For example, a beneficiary with their own IHT liability may wish to transfer their inheritance to a discretionary trust to avoid the inheritance increasing their IHT liability. Any life interest created by a deed of variation should be treated as an immediate post death interest (IPDI) and ensure anniversary and exit charges would not apply to the trust whilst the life tenant is alive which would not be the case for a life interest trust created during a person’s lifetime.