Deeds of Variation: How They Work and How They May Affect Inheritance Tax
This guide explains how deeds of variation work, who can make changes and the rules to consider before redirecting an inheritance.
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Inheriting money or property can involve important financial decisions, particularly when considering how an estate should be shared. Sometimes, the original arrangements may no longer reflect a family's circumstances or the wishes of those receiving an inheritance.
What Is a Deed of Variation?
A deed of variation is a legal document used to change how some or all of a deceased person's estate is distributed. It enables a beneficiary to redirect inheritance they would otherwise receive under a will or the rules of intestacy.
Also known as an instrument of variation, it can be used to:
Redirect part or all of an inheritance to another person
Provide for someone who wasn't included in the original will
Pass inherited assets to children or grandchildren
Make a charitable donation from an inheritance
Place inherited assets into a trust
Potentially improve the estate's Inheritance Tax position
For example, someone who inherits £100,000 might decide they don't need the full amount and would prefer £40,000 to pass directly to their children. A deed of variation could formally record this change.
A deed of variation allows beneficiaries to vary how an inheritance is distributed after death without rewriting the entire will. Any provisions not affected by the variation remain unchanged.
Who Can Change an Inheritance?
A beneficiary who is entitled to receive assets from an estate can generally agree to redirect some or all of their inheritance. This applies whether the deceased left a valid will or died without one.
However, beneficiaries can only vary entitlements they have the authority to change. They cannot independently reduce another beneficiary's inheritance.
Who may be involved in a variation
| Person | Their role |
|---|---|
| Beneficiary | Can agree to redirect some or all of their inheritance |
| Other affected beneficiaries | Must agree if their entitlement is reduced |
| Executor or administrator | May need to participate, particularly where the variation increases Inheritance Tax |
| Solicitor | Can prepare the document and check that legal requirements are met |
| Parent or guardian of a minor | Cannot ordinarily give up a child's inheritance on their behalf without appropriate court approval |
| Person | Beneficiary | Other affected beneficiaries | Executor or administrator | Solicitor | Parent or guardian of a minor |
|---|---|---|---|---|---|
| Their role | Can agree to redirect some or all of their inheritance | Must agree if their entitlement is reduced | May need to participate, particularly where the variation increases Inheritance Tax | Can prepare the document and check that legal requirements are met | Cannot ordinarily give up a child's inheritance on their behalf without appropriate court approval |
Additional complications can arise where someone lacks mental capacity or where trusts are involved.
A variation is generally intended to be a voluntary decision. A beneficiary shouldn't receive payment or another outside benefit in exchange for redirecting their inheritance if the variation is to qualify for the special tax treatment.
The Two-Year Deadline and Other Conditions
To qualify for the special Inheritance Tax and Capital Gains Tax treatment, the variation must be completed within two years of the person's death.
This is a strict deadline. All necessary parties must sign within the permitted period.
Key requirements for a qualifying variation
Written agreement: The changes must be recorded in writing, identifying the inheritance being redirected.
Two-year deadline: The document must be completed within two years of death.
Beneficiary consent: Anyone giving up or reducing their entitlement must agree.
No outside payment: The variation must not be made in return for money or other consideration outside the permitted estate arrangements.
Appropriate tax statements: The document must include the required wording if the parties want the special Inheritance Tax or Capital Gains Tax treatment.
A variation may be completed before or after probate has been granted, provided the relevant conditions are satisfied.
Changes may still be possible after two years under ordinary legal arrangements, but they won't qualify for the same retrospective tax treatment.
This could mean that a later transfer is treated as a gift made by the beneficiary rather than an inheritance passing directly from the deceased.
How a Variation Can Affect Inheritance Tax
A deed of variation may help reduce Inheritance Tax (IHT) by allowing assets to pass directly from the deceased to a new beneficiary for tax purposes, rather than being treated as a gift from the original beneficiary. This can help make use of available exemptions or reliefs.
Illustrative example: Redirecting an inheritance
| Original inheritance | After a variation | |
|---|---|---|
| Beneficiary | Adult daughter | Daughter and registered charity |
| Inheritance | £200,000 | £150,000 to daughter; £50,000 to charity |
| Potential tax effect | Standard estate tax treatment | Charitable exemption may reduce the taxable estate |
| Beneficiary | Inheritance | Potential tax effect | |
| Original inheritance | Adult daughter | £200,000 | Standard estate tax treatment |
| After a variation | Daughter and registered charity | £150,000 to daughter; £50,000 to charity | Charitable exemption may reduce the taxable estate |
This is a simplified example. Any tax saving depends on the estate's total value, available allowances, exemptions and other circumstances.
A variation may also be used to redirect assets to a surviving spouse or civil partner, or pass an inheritance directly to younger generations.
However, a deed of variation doesn't automatically reduce Inheritance Tax. Important considerations include:
Available allowances: Estates within the available IHT allowances may see no immediate tax benefit.
Existing exemptions: Redirecting assets away from an exempt beneficiary could increase the tax payable.
Personal finances: Giving up an inheritance could affect your financial security, future estate planning or entitlement to means-tested benefits.
Any potential tax savings should be considered alongside your circumstances and the needs of everyone involved.
Capital Gains Tax and Trusts
A deed of variation can affect Capital Gains Tax (CGT), particularly when inherited assets include property or investments.
Inherited assets are generally valued at the date of death for CGT purposes. A qualifying variation can redirect these assets without triggering a disposal by the original beneficiary, although the new recipient may still pay CGT on future gains.
Using a Variation to Create a Trust
A deed of variation can also redirect inherited assets into a trust, helping families manage an inheritance for children, vulnerable beneficiaries or others who need ongoing financial support.
However, trusts can involve additional tax and administration requirements. Different arrangements may have different Inheritance Tax, Capital Gains Tax and Income Tax implications, and the special retrospective tax treatment available for IHT and CGT doesn't automatically apply to Income Tax.
Specialist legal and tax advice is recommended before using a deed of variation to establish a trust.
How to Make and Record a Variation
A deed of variation must clearly identify the inheritance being changed, the people involved and the new arrangements.
Although the name suggests otherwise, the document doesn't always have to be a formal deed. A written agreement can be sufficient if it meets the relevant legal and tax requirements.
Typical steps in preparing a variation
Review the inheritance: Identify the assets involved and the original beneficiaries.
Agree the changes: Decide who will receive the redirected inheritance and obtain the necessary consent.
Consider tax implications: Assess the potential effects on Inheritance Tax, Capital Gains Tax and other financial arrangements.
Prepare the document: Record the changes and include any required tax statements.
Sign and retain records: Ensure the necessary parties sign within the deadline and keep the document with the estate records.
A solicitor experienced in wills and estate administration can help ensure the variation is properly drafted.
Variations Where There Is No Will
When someone dies without a valid will, their estate is distributed under the rules of intestacy. A deed of variation can redirect some or all of a beneficiary's inheritance, provided the relevant parties agree.
The two-year deadline still applies for the special Inheritance Tax and Capital Gains Tax treatment.
Consent From Affected Beneficiaries
Anyone giving up or reducing their inheritance must agree to the variation. Beneficiaries whose entitlements remain unchanged don't generally need to sign.
Court approval may be required where children or people lacking mental capacity are affected. Executors or administrators may also need to sign if the variation increases the estate's Inheritance Tax liability.
Required Tax Statements
To qualify for retrospective tax treatment, the variation must include a statement confirming that the relevant Inheritance Tax and/or Capital Gains Tax provisions apply.
Without this, the transfer may be treated as a gift or disposal by the original beneficiary, potentially resulting in different tax consequences.
HMRC provides model wording, although professional advice can help ensure the statement is appropriate.
When HMRC Must Receive a Copy
HMRC doesn't generally need to approve a deed of variation before it's signed. However, notification requirements depend on how the variation affects the estate's tax liability.
When to send a variation to HMRC
| Circumstances | What happens |
|---|---|
| Variation increases Inheritance Tax payable | A copy must be sent to HMRC within six months, together with details of the additional tax due |
| Variation doesn't change the Inheritance Tax payable | Generally, no requirement to send a copy |
| Variation reduces Inheritance Tax payable | The document may need to be submitted to support an amended calculation or repayment claim |
| Circumstances | Variation increases Inheritance Tax payable | Variation doesn't change the Inheritance Tax payable | Variation reduces Inheritance Tax payable |
|---|---|---|---|
| What happens | A copy must be sent to HMRC within six months, together with details of the additional tax due | Generally, no requirement to send a copy | The document may need to be submitted to support an amended calculation or repayment claim |
The signed variation should be retained with the estate records, even where no submission is required.
If you're unsure whether HMRC needs to be notified, seek advice before the relevant deadline.
When to Seek Regulated Advice
Legal advice is important when preparing a deed of variation, while regulated financial advice can help you understand how receiving or redirecting an inheritance may affect your wider finances.
Regulated financial advice may be particularly helpful if you:
Have inherited money and want to consider your retirement options
Are deciding whether to retain or redirect inherited assets
Want to understand how an inheritance could affect your existing investments
Are considering how to provide financial support for family members
Need to review your pension and retirement income plans following a bereavement
Want to consider your wider estate and inheritance planning arrangements
My Pension Expert’s team of advisers can help you explore how an inheritance fits into your financial circumstances and retirement goals. They can provide regulated advice on relevant pension and investment decisions, while a qualified solicitor or tax specialist can advise on preparing a deed of variation and its legal and tax implications.
Taking advice before making changes can help you understand the potential benefits, costs and risks.
Frequently Asked Questions
No. Despite its name, a formal deed isn't always required. A written document or letter may be sufficient if it meets the legal conditions, including the necessary signatures and tax statements.
An executor cannot independently change beneficiaries' entitlements simply because they administer the estate. Changes generally require the agreement of those whose inheritance is being reduced. Executors may also need to participate in certain variations.
An inheritance may sometimes be redistributed after two years through other legal arrangements. However, it won't qualify for the special retrospective Inheritance Tax and Capital Gains Tax treatment available to a qualifying variation made within two years of death.
Yes. A beneficiary can redirect some or all of their inheritance to a qualifying charity. Depending on the estate's circumstances, this may reduce the Inheritance Tax payable. The variation must meet the relevant legal and tax requirements.
HMRC doesn't generally need to approve a deed of variation before it's signed. If it increases the Inheritance Tax payable, a copy must be sent within six months. Other circumstances, such as a repayment claim, may also require submission.
Yes. A deed of variation can change how an inheritance passes under the intestacy rules. The affected beneficiaries must agree, and the relevant conditions must be met for the special tax treatment to apply.
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This article is for general information only and does not constitute legal, tax or financial advice. Inheritance and tax rules depend on individual circumstances and may change. Seek appropriate professional advice before making changes to an inheritance.
