A Deed of Variation is a legal document in which one or more beneficiaries of a deceased person’s estate can choose to give away or reduce the amount of an inheritance they have been left in a Will, or if there is no valid Will, left through the Intestacy Rules.
Why would you use a Deed of Variation?
A common use is to reduce the value of someone’s estate and their inheritance tax liability by transferring some or all of the legacy from one beneficiary to another person.
For example: Sandra, who was 85 years old, was left £50,000 by a relative, Donald. The £50,000 would have pushed the value of Sandra’s total estate over £500,000, which is the inheritance tax threshold (£175,000 residence nil rate band + £325,000 nil rate band). If Sandra gave the money away as a gift, there would also be tax payable on it if she died within 7 years. Sandra decided to have a Deed of Variation drawn up, so the £50,000 left by Donald went directly to her daughter Melissa instead.
By making the Deed of Variation, the law allows the £50,000 gift to be treated as if it was made by Donald directly to Melissa from his estate, rather than Sandra’s estate. As Sandra was planning on leaving all of her estate to her daughter, and did not need the extra money, this seemed the most tax efficient option. By drawing up the Deed, Sandra did not have to worry about the 7-year lifetime gift rule or that her estate would exceed the Inheritance Tax Threshold and the extra £50,000 would be taxed at 40% when she died.
Another reason for a Deed of Variation is where there is no valid Will (hence the estate will be distributed according to Intestacy Rules) or the Will was made a long time ago and does not reflect recent events or wishes of the deceased at the time of their death. For example, the deceased would have wanted to provide for a partner who would otherwise not inherit as they were not a legal spouse, or a child born after the Will was drawn up.
Who can action a Deed of Variation?
Any adult individual who has mental capacity and is entitled to benefit from a deceased person’s estate is free to inherit and give away their inheritance to whoever they choose in a Deed of Variation. A beneficiary can nominate someone else to take their individual entitlement, either absolutely or in part.
A Deed of Variation cannot be used by someone to increase their inheritance, or ‘disinherit’ another beneficiary. It can also not change the appointment of executors or guardians in a Will.
How to draw up a Deed of Variation
Deeds of Variation can be made before or after Probate, even if the deceased’s estate has already been distributed. Importantly, a Deed of Variation must be drawn up within two years of the person’s death.
The deed must be signed by any beneficiaries who may be negatively impacted by the variation and witnessed correctly for it to be legally binding. Usually, the executors would sign also the document, but this is not an absolute requirement unless they are affected by the terms of the variation or where the Deed of Variation increases the IHT payable by the deceased’s estate.
To be valid the Deed must clearly set out the alterations that are being made and include a statement of intent that specifies that the Taxation of Chargeable Gains Act 1992 and the Inheritance Tax Act 1984 apply to the document. A copy of the Deed must be sent to HMRC within 6 months of date upon which the Deed was made, if inheritance tax is payable on the estate.
How we can help
Just like a Will, a Deed of Variation is an important legal document and should ideally be drawn up by a professional to ensure it is valid. Depending on the nature of the variation, advice might also be needed in relation to inheritance tax.
As the paperwork needs to be completed within two years from the date of death, we recommend the process is started as soon as possible, as whilst some Deeds of Variation are straightforward, other situations may be more complex. We will consider all the factors and advise on the options available.
Please contact our Wills, Trusts & Estate Administration team to see how we can assist on 0118 975 6622 (Lower Earley office) or 01491 570900 (Henley-on-Thames office) or send us a confidential email to office@thpsolicitors.co.uk