Deed of Variation or Post Death Variation

Deed of Variation or Post Death Variation.

Links to pages on different aspects of deeds of variation are below the main text of this page. You are welcome to give as a quick ring on 01323 741204 to see if a deed of variation might be appropriate. It is a rather technical subject!

What is the effect of a Deed of Variation?

A Deed of Variation has the effect of writing the provisions of the variation into the

Deed of Variation

Deed of Variation

terms of the deceased’s Will or the intestacy (no valid Will) for tax or other reasons.  So they are effective, retrospectively, to the time of death. The estate is then charged Inheritance Tax based on the variation.

The beneficiaries and trustees of a deceased’s estate may wish to rearrange the disposition of the estate for a number of reasons. The main ones being either to redirect assets to those who are less well provided for or to save tax, in particular Inheritance Tax.  To achieve the desired writing back effect that a variation can provide the beneficiaries must complete the deed of variation within two years of the deceased’s death.

Contact us to discuss a Deed of Variation.   Obviously, we can also help with obtaining probate in the first place.  Ideally the deed of variation would be organised at the same time as probate.

If the deed of variation results in additional IHT being payable by the estate then the personal representatives (executors) dealing with the estate must also join in this statement. The executors can only refuse to do so if there are not enough assets to meet the additional liability.

If a statement to this effect is not given, the redirection of assets will be classed as a PET by the beneficiary or a transfer of value on which further Inheritance Tax may be immediately payable. (A PET is a potentially exempt transfer – a potentially taxable gift. No immediate tax, but extra IHT could become payable in certain circumstances.)

Deed of Variation and Capital Gains Tax.

The position for Capital Gains Tax is similar.  A special statement must be made within the deed of variation. Although no CGT is payable on death, the inclusion of such a statement prevents the redirection of assets being classed as a disposal by the beneficiary. Because of the necessity to include a statement as to the writing back effect it is entirely possible to use this aspect only where it is beneficial.

If a statement is not included as far as IHT is concerned, then the property is treated as having passed to the original beneficiary.  The beneficiary is then classed as making a gift (a potentially exempt transfer or PET.)  That means that if he or she survives for seven years then the transfer will normally escape additional tax.  However, if she/he dies within the seven year period then (extra) IHT will become chargeable. The effect of using the statement within the deed of variation depends on several factors such as whether the original or new beneficiaries are exempt.

What can be varied in a Deed of Variation?

It is possible to vary ‘any of the dispositions (whether effected by Will, under the law relating to intestacy or otherwise) of the property comprised in the estate immediately before death’  (IHTA 1984 s142).  A Deed of Variation can even be used where an asset passes outside of the estate. For example; where property is held as joint tenants and has passed by survivorship to the surviving co-owner then the co-owner can elect to vary this effect by carrying out a retrospective severance.  The effect of this severance is that the whole property does not automatically pass to the survivor.  It may be better for the deceased share of the property to go into trust for example.

There are assets which cannot be the subject of a deed of variation. These include any property in which the deceased had an “interest in possession.”  Also property to which the deceased was classed as having an interest by the application of the “reservation of benefit rules”. Both of these may attract inheritance tax on death. But they are specifically excluded from being the subject of a deed of variation by section 142.  In effect, they are the result of Inheritance Tax planning not being up to date at the time of death.   Our Tax barrister does offer an Inheritance Tax Planning service.

Income tax and deeds of variation.

There are no specific income tax provisions equivalent to the IHT and CGT provisions. This means that income received by the original beneficiary prior to the deed of variation will be taxed as income of the original beneficiary even if the entire income received since the date of death is given up.

Contact us if you feel a deed of variation might be appropriate – an initial chat is free. Please remember that we are a business, and whilst we are always happy to have a brief exploratory chat, we do charge (modestly) for our time.  For details of our fees for deeds of variation click.

See also:

Deed of Variation or Post Death Variation.