What is a deed of variation?
Also known as an instrument of variation, a family arrangement, a deed of surrender, or a deed of assignment, a deed of variation allows beneficiaries of a deceased’s estate to alter the distribution of that estate, or relinquish a bequest from an estate by changing the deceased’s will. If there is no will and the law dictates who inherits, changes to the inheritance can be made in the same way as if there is a will.
How can a deed of variation be used?
A deed of variation allows the beneficiaries of a deceased’s estate to rewrite the distribution of the estate so it passes on in the most inheritance tax (IHT) efficient way and to minimise capital gains tax (CGT) liability. They can also be used to pass the estate to a different beneficiary.
It can be introduced up to two years after the date of death. Making a discretionary trust and skipping a generation are both ways in which deeds of variations can be used to alter the will of a deceased to reduce IHT liability.
To establish a deed of variation, all the beneficiaries of the will must be in agreement. When children are involved, they are considered incapable of giving consent so an application must be made to the courts for consent to be obtained on their behalf.
Why use a deed of variation?
There are many reasons why it may be desirable to amend the will of a deceased or an intestacy; for example, to balance the differences in the finances of the beneficiaries (perhaps from a wealthy sibling to a poorer one); to pass the inheritance on to the next generation of struggling grandchildren, rather than swelling the estates of wealthy parents; to provide for someone who was left out of the will; to move the deceased’s assets into a trust; or to clear up any uncertainty over the will.
When can a deed of variation be used?
A deed of variation can only be used if:
- everyone adversely affected agrees;
- there is no reciprocation – no one is compensated for what they give up;
- none of the assets are affected by a gift with reservation;
- if the variation affects the rights of children or unborn children, court approval will be needed.
Making a deed of variation
Despite its name, to make a variation deed and thus changing the deceased’s will, you don’t need a formal deed or document – just writing a letter will suffice. You should use form IOV2 to work out whether a variation to the will meet all the necessary legal requirements.
If the variation means there’s more IHT to pay, you should send a copy to HM Revenue and Customs (HMRC) within six months of making it. You don’t need to send a copy to HMRC if the variation doesn’t change the amount of IHT due.