Deeds of Variation
A Deed of Variation allows a beneficiary under a Will or an intestacy to re-direct his/her gift or his/her benefit to someone else. This note refers throughout to the variation of a Will, but the same principles apply to the variation of an intestacy. This may be done for a number of reasons:
- To save Inheritance Tax;
- To make a gift to someone who has been left out of the Will, or who has not received as much as he/she should have;
- To change the type of gift made in the Will to a right to receive a sum of money;
- To clarify an uncertainty or amend a defect in the Will;
- To have the ownership of jointly owned property or other jointly owned assets (such as a bank account) severed to avoid the jointly owned asset passing to the joint owner on death.
A variation cannot be done without the consent of everyone likely to be affected by it. So a variation cannot be done if the affected persons are minor children, as they cannot enter into a Deed. Such a variation would need the consent of the Court before it could be done, and such consent is not readily given.
How does one go about it?
A Deed of Variation can be done at any time, but if it is done to save Inheritance Tax or Capital Gains Tax, it must fulfil the following requirements:
- It must be completed within two years of the date of death;
- The right tax declarations must be included in the Deed;
- There must be no inducements (such as a cash payment) given to any beneficiary to enter into the Deed;
- The destination of an asset cannot be varied more than once in different deeds, although more than one deed is permissible if they deal with different assets.
The Deed of Variation ‘replaces’ the old Will with a new Will (or new clauses in the old Will) for distribution and tax purposes. A Deed of Variation can be done even if the administration of the estate has been completed and the deceased’s assets distributed.
It can be done before or after a Grant of Probate is issued.
The tax implications of a Deed of Variation
The main effect of a Deed of Variation is that the alteration made by the Deed is treated as having been made by the deceased, and not by the beneficiary who has given up his entitlement under the Will. This can be an advantage, as the usual rules applying to lifetime potentially exempt transfers do not apply, and the beneficiary concerned does not have to survive seven years to avoid the value of the gift being added to his own estate for the purpose of calculating Inheritance Tax.
Similarly, the rules regarding a gift with reservation (where you cannot give something away and continue to enjoy it) do not apply as the deceased will already have died and cannot therefore continue to benefit from the gift.
A Deed of Variation can mean that the Inheritance Tax payable on the deceased’s estate is reduced (for example, if the re-directed gift is to a surviving spouse or a charity); conversely it can mean that the Inheritance Tax is increased (for example, if the gift is redirected away from the spouse to a child)
Capital Gains Tax (CGT)
A re-direction of an asset by a Deed of Variation is not a disposal for CGT, as long as it is made within two years of the date of death, and a declaration is included in the Deed.
In such a case, the new beneficiary is deemed to receive the re-directed asset as though he were the original beneficiary, at its market value at the date of death.
There are however differences if the new beneficiary is a trust. Please ask for advice if this is to be the case.
As we have seen above, a new Will or re-directed gift in a Deed of Variation is treated for Inheritance Tax and CGT as though it were the deceased’s Will or gift. For income tax purposes however, the situation is different.
Up to the date of the Deed of Variation, any income which the original beneficiary has received will be taxed as belonging to him/her.
After the date of the Deed of Variation, the income becomes the income of the new beneficiary, including income arising before the date of the Deed which is not distributed to the original beneficiary.
Again, there are differences if the new beneficiary is a trust.
A Deed of Variation is an important weapon in your tax planning armoury, and should always be considered as part of a family’s overall tax planning.
For help and advice contact
Jill Hallam 07523 963026 or 01773 549037
40 HIgh Street