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Deeds of Variation and when to use them

Deeds of variation have hit the headlines recently with reports that Ed Miliband benefited from a variation of his fathers will some years ago. While this has attracted debate, the variation of wills is a standard practice permitted by law at least for the time being. George Osborne has recently announced that deeds of variation are under review, with a report due in autumn 2015.

Until then, varying an estate is still an option available to beneficiaries within two years of a person’s death, with potential tax savings to be achieved. Sarah Hartley at Malcolm C Foy & Co in Doncaster and Rotherham explains how a deed of variation can be used to achieve this and the requirements to be aware of.

Deeds of variation – a summary

A deed of variation is a document that alters a will (or an intestacy) after the death of a deceased. It does this by redirecting assets away from one beneficiary of an estate to another beneficiary. We tend to think of wills as set in stone and the concept of changing them after a persons death can seem odd. But it is important to remember that a variation can only be entered into with the consent of the original beneficiary; it is not possible to redirect assets away from the intended recipient without their agreement. A deed of variation is basically a gift from a beneficiary of an estate to another, which can be treated for tax purposes as being made by the deceased.

Uses of a deed of variation

There are two main reasons for entering into a deed of variation. First, where the original beneficiary wishes the benefit under an estate to pass elsewhere. This might be because they have no need of the assets or do not want to increase the size of their own estate. And second, because changing a will or redirecting assets under intestacy may save inheritance tax on the estate in question.

So for example, if assets have been left to adult children in a will this can in some circumstances create a liability for inheritance tax. If the deceased had a surviving spouse the children could decide to redirect their entitlement to the spouse, with the result that no inheritance tax would be payable. This is because spouses are exempt from paying inheritance tax. Another example might be where a deceased has not used his nil rate band for inheritance tax purposes, perhaps because everything passes to his wife on his intestacy. It would be open to the spouse to redirect a sum equivalent to the nil rate band (currently £325,000) away from herself and into a trust. This would still allow her to benefit from the trust fund, but the value would be protected from, for example, care home fees on her own estate.

Requirements to be aware of

While a will can be varied at any time, to be effective for tax purposes a deed of variation must be entered into within two years of the date of death. It must also contain a statement electing for inheritance tax treatment. This means that for inheritance tax purposes the gift made by the variation will be treated as if it was made by the deceased. If the variation does not contain this statement, the gift will be treated as a direct gift from the original beneficiary to the new beneficiary. This means that it would be subject to the usual need for the donor to survive seven years from the date of the gift to be effective for inheritance tax purposes. A similar statement should usually be included in the variation for capital gains tax purposes.

It is important to note that a deed of variation cannot be made for consideration. So for example, say Mrs Brown leaves all her assets to her children in her will and they decide to divert the gift to their father to avoid a tax charge on her estate. The gift would be ineffective if there was an agreement between the father and the children that he would make gifts to them by way of compensation at a later date.

For advice on deeds of variation contact Sarah Hartley at Malcolm C Foy & Co on 01302 340005 or 01709 826866, or by email at shartley@malcolmcfoy.co.uk

The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice, and the law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.

This was posted in Bdaily's Members' News section by Sarah Hartley .