Deed of Variation

What it is

A document by which someone who has inherited redirects all or part of what they received to somebody else. Where it is done correctly, the redirection is treated for tax as though the deceased had made the gift themselves, so the person redirecting is not treated as making a gift at all.

People use it to skip a generation, to correct a Will that no longer fits the family, to use an allowance that would otherwise be wasted, to provide for someone the Will missed, and to reach the reduced rate of Inheritance Tax by giving to charity.

How it works

The conditions are strict, and all of them have to be met.

• It has to be completed within two years of the death. This deadline does not move.
• It must be in writing, and must identify clearly what is being varied and who benefits.
• Everyone left worse off has to agree, and they must be adults with capacity. Where a beneficiary is a minor, only the court can consent. Parents cannot consent on a child’s behalf.
• It must contain the statement that the relevant Inheritance Tax and Capital Gains Tax provisions are to apply. You can elect for one and not the other, and sometimes that is exactly what you want.
• The same assets cannot be redirected twice. If a mistake is made, the only route is rectification, and the evidence needed is a very high bar.
• Nobody redirecting can be compensated with assets brought in from outside the estate. Beneficiaries can exchange interests with each other.
• Where a charity benefits, it has to be notified, and evidence of that provided to HMRC.

Where specialist advice matters

• There is no reading back for income tax. Income arising before the variation stays taxed on whoever was entitled to it.
• Redirect into a trust for your own minor children and you will be taxed on the trust income until they are 18. A disclaimer sometimes avoids this and sometimes cannot be used at all.
• Property in which the deceased held an interest in possession, for example as the life tenant of an earlier trust, cannot be varied.
• Arrangements that redirect an inheritance and then quietly return it to the original beneficiary are exactly what HMRC looks for.
• A variation can create a new trust, which brings registration obligations with it.