An after death Deed of Variation is a superb estate planning tool and undoubtedly a quick win that individuals should consider in particular circumstances. If you inherit an interest in a deceased’s estate through a Will or intestacy or survivorship*, then you can potentially vary your entitlement so that instead of it passing to you it passes onto another beneficiary or into a trust structure.
The benefit of a Deed of Variation over you just making a gift is that it can be read back as if the deceased made the gift themselves for both Inheritance Tax purposes and Capital Gains Tax purposes.
In order for a Deed of Variation to be applicable the following have to be met:
- It needs to be in writing
- It needs to be by the individual who benefitted
- It needs to be made within two years
- It needs to stipulate whether you want it to be read back for Inheritance Tax and/or Capital Gains Tax purposes.
If you didn’t execute a deed of variation and just gifted your entitlement to someone else you would need to survive seven years for it to fall outside of your estate for Inheritance Tax purposes. However, if you do it through a Deed of Variation it means that it is seen as though the deceased made the gift themselves and therefore there is no need for you to survive seven years for it to fall outside of your estate. Therefore, if you receive an inheritance which you don’t need and you want to pass down to the next generation this is a great way of you being able to do that without the funds ever falling into your estate.
Deed of Variation and Gift Compared: CGT
In addition it has Capital Gains Tax advantages. If the inheritance had increased in value from the date of death up until the date you were making the gift then normally there would be potential Capital Gains Tax to pay. However, if you are doing it through a Deed of Variation and you elect for it to be read back for Capital Gains Tax purposes, it is seen as though it is being made from the deceased’s estate and so there would be no Capital Gains Tax.
Individual or Trust?
You also have the choice of either giving the funds directly to an individual or passing them into a trust, if you want to retain some additional control over the assets.
The one thing that you do need to be aware of is that the government regularly talks about removing Deeds of Variation. However to date they are still commonly used and accepted by HMRC and are a great estate planning tool to consider. If you inherit from an estate and want to pass your inheritance onto someone else, I would highly recommend that you seek legal advice so that this can be structured in the most tax efficient way that is consistent with your objectives.
By Emma Parsons, Personal Wealth Partner
* Intestacy refers to an individual who dies without making a Will. Survivorship is where an asset is owned jointly (e.g. by a couple) and the asset passes to the surviving co-owner outside of any Will or of the intestacy rules.
Disclaimer: While we do all that is possible in terms of ensuring its accuracy, this article contains general information only. Nothing in these pages constitutes legal advice. You need to consult a suitably qualified lawyer from the firm on any specific legal problem or matter.