What is a Deed of Variation?
A Deed of Variation is a document that can allow you, if you are the adult beneficiary of an estate (whether or not there is a Will), to alter how your legacy is dealt with.
A Deed of Variation must be prepared and signed within two years of the date of death and can take place either before or after assets have been transferred to you. Deeds of Variation can have a retrospective effect for inheritance tax (IHT) and capital gains tax (CGT).
Reasons for having a Deed of Variation
The reasons for having a Deed of Variation prepared may be to pass on some or all of your entitlement to another person or to a charity so that they can receive the benefit. It can also be used to put funds or assets into a trust.
Alternatively a Deed of Variation can be used to carry out a tax planning exercise for the estate or for yourself by giving assets to someone who is exempt from IHT (e.g. a surviving spouse or a charity); or by redirecting assets which qualify for IHT relief to make better use of that relief; or to use up the deceased’s IHT tax free allowance.
For IHT purposes, in effect what would otherwise be a gift from you (known as a ‘Potentially Exempt Transfer’ or PET) is instead treated as a gift from the deceased person.
For example, if you received your full entitlement from the estate and then made a gift to another person and you died within 7 years of the date of that gift, the amount of the gift (then called a ‘failed PET’) would be pulled back into the IHT calculation for your own estate. By using the Deed of Variation, the gift is in effect from the deceased person’s estate and not from you so there are no negative consequences for your own estate.
Similarly, for CGT purposes, if you were to receive the asset and then sell it or give it away there may be CGT consequences for you. However, if a Deed of Variation is used, then it is treated as passing from the deceased person’s estate rather than from you.
The disadvantage of having a Deed of Variation prepared includes of course the fact that you would no longer have access to the asset that is given away.
In order to decide whether a Deed of Variation is appropriate for you, you will need to take advice on your own financial position, including your IHT and CGT situations.