What are deeds of variation?
MARK STUBBERFIELD >
Head of Wills, Probate and TrustsTue 10 May 2022
Rik Mayall, actor unexpectedly died in June 2014 leaving his family exposed to a large inheritance tax bill (IHT) because he had not made a will. However, if this situation occurs, you can still try to lessen the impact of the IHT by drawing up and executing a Deed of Variation.
Variations can also be made to Wills. Ed Miliband was accused of benefiting from a deed of variation to this father’s will made by his mother. In 1994 Mr Miliband, his brother and their mother agreed to make a posthumous amendment to the Will of their father.
Under the change, each of the Miliband brothers received a 20% share of the family home. Thereby reducing Mrs Miliband’s share to 60% and reducing the inheritance tax liability on her estate.
Although Ed Miliband denied any tax benefit from the arrangement. In the 2015 Budget Statement Chancellor George Osbourne stated a review on the avoidance of inheritance tax using deeds of variation as part of the government's wider tax avoidance strategies. No changes were made to the relief for many probate practitioners and their clients. There is never any guarantee that this will not be reviewed again in subsequent budgets.
What is it?
Also known as a Deed of Family Arrangement, this type of Deed allows beneficiaries to rearrange or vary their entitlement whether or not the deceased made a Will. The beneficiaries of a deceased’s estate are able to alter the distribution of or relinquish a bequest from an estate.
Contributions that must be met
The law states that subject to strict conditions a variation takes place as if it had been made by the deceased. Then it is “read back” into their Will/estate for IHT purposes.
It is therefore classed as a gift which is legitimately allowed to take place. For IHT and Capital Gains Tax (CGT), the consequences are as if the gift had been made by the deceased. These must be completed within two years from the date of death to benefit from any tax relief.
In order to establish a Deed of Variation all the beneficiaries must be in agreement. If minors are involved an application must be made to the court for consent to be obtained as they cannot themselves consent to the changes. It is also possible for a beneficiary to redirect their entitlement into trust with the deceased being treated as the settlor of the trust for IHT purposes. However, for CGT and Income Tax purposes the original beneficiary not the deceased is treated as the settlor.
What are they used for?
Deeds of Variations are not just used for tax reasons. In fact the origins of these types of deed are much older than the IHT rules and fit well with our freedom to leave our estate by Will to whoever we choose.
For instance, if a grandparent leaves a legacy in a will to named grandchildren and then does not update his/her Will when further grandchildren are born. The deed would allow the new grandchildren to be added to the Will.
They can also be used with care to resolve a family dispute or unhappiness. For instance, a claim may be brought against an estate by a person expected to inherit under a will but who has not. This sort of claim could be settled by the other beneficiaries using a deed of variation to make provision for them.
This does mean that there are other benefits and not just the to save tax.
Please contact Mark Stubberfield at our Brighton office on 01273 830030 or email him directly by clicking the 'contact us' icon. Please click here to read more about our Wills, Trusts & Probate department.
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