Earlier this year, we explored what cannot be achieved with a deeds of variation. In this follow-up, we focus on what can be achieved, particularly its utility in estate planning, tax mitigation, and family arrangements.
Deeds of Variation Background
A deed (or instrument) of variation allows beneficiaries to redirect their entitlement under a will, intestacy, or survivorship under joint tenancy. The key provisions governing variations are found in the Inheritance Tax Act 1984 (S142) and the Taxation of Chargeable Gains Act 1992 (S62).
To be effective for inheritance tax (IHT) and capital gains tax (CGT) purposes, the variation must meet certain formal requirements. Failure to comply may result in it ineffective for tax purposes. This includes it being in writing, signed by all beneficiaries whose entitlement is being varied and being made within two years of death of the deceased.
When valid, a deed of variation alters the IHT and CGT implications of the redirection. For tax purposes, the gift is treated as if made by the deceased’s estate, not by the beneficiaries. This can have several different benefits.
Inheritance Tax and Capital Gains Tax Planning
A deed of variation can help beneficiaries who wish to give away their inheritance without triggering adverse tax consequences. Normally, giving away part or all of an entitlement would be treated as a Potentially Exempt Transfer (PET) for IHT purposes (assuming no Gift With Reservation of Benefit (GROB)) and may constitute a disposal for CGT purposes. Completing the gift via a variation ensures the gift is deemed to come from the deceased’s estate.
Utilising Nil Rate Bands
A deed of variation can help fully utilise the deceased’s Nil Rate Band (NRB) or Residence Nil Rate Band (RNRB), particularly in complex estates.
For example, a widow with a transferable NRB from a first marriage leaves their estate to a surviving spouse. While this transfer is exempt under the spousal exemption, the surviving spouse cannot use the deceased’s second NRB when they die as only one transferable NRB can be used. A deed of variation could redirect assets to use one of the deceased’s NRBs now to make most out of their allowances.
Redirecting to Spouse
Where part of an estate passes to children under intestacy, a beneficiary may wish to redirect assets to the surviving spouse. This ensures the spouse is provided for and avoids IHT on the deceased’s death due to the spousal exemption. Alternatively, children may consider redirecting assets into a life interest trust for the spouse, to balance provision with long term protection of assets.
Family Arrangements and Fairness
Deeds of variation can address perceived unfairness or better reflect the deceased’s wishes. For example:
- Where a will does not account for changed family circumstances (e.g., birth of grandchildren), a variation can include omitted beneficiaries.
- Beneficiaries may agree to redistribute assets for equality among siblings or to support vulnerable family members.
- Where a will or intestacy fails to make reasonable provision for a dependant, a variation can allocate assets accordingly, potentially avoiding a claim under the Inheritance (Provision for Family and Dependants) Act 1975.
Charitable Giving
A deed of variation can facilitate charitable gifts, reducing IHT through the charitable exemption. If at least 10% of the net estate is left to charity, the estate may qualify for the reduced IHT rate of 36%.
Creating Trusts
Variations can create new trusts or redirect assets into existing trusts for family members or other beneficiaries. For tax purposes, the trust is treated as created by the estate, not the beneficiary
For example, a beneficiary may vary their inheritance into a discretionary trust to keep assets outside their estate for IHT purposes and provide long-term protection for their bloodline.
Conclusion
Deeds of variation are a flexible and powerful tool in estate planning. They enable beneficiaries to adapt arrangements to suit changing family circumstances, optimise tax efficiency, and honour the deceased’s wishes. However, these benefits depend on strict compliance with formal requirements. Failure to meet these conditions can undermine the intended outcomes.
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