Deeds of Variation

A Deed of Variation (also known as a Deed of Family of Arrangement) is a document which enables the beneficiaries of an Estate to change the terms of a Will, after the date of death, by altering how the Estate should be divided up.

Why execute a Deed of Variation

The reasons most commonly chosen for entering into a Deed of Variation are:

A beneficiary does not need or want their inheritance or believes younger family members have more need
Family members have been born since the Will was executed
The beneficiaries wish to benefit charity
The Will is no longer tax efficient
The beneficiaries wish to redirect assets into a Trust
By executing a Deed of Variation, the beneficiaries effectively re-write the Will and as a result the gifts made under the Deed of Variation are treated as being made by the Deceased rather than the beneficiaries. For tax purposes, this means that the beneficiaries are not treated as having made taxable gifts to the new recipients.

Limitations

In order for the Deed of Variation to work for tax purposes, it must be executed within 2 years of the date of death.

There are also restrictions on what can be included in the Deed of Variation. The Deed cannot:

Change the Executors/Trustees of the Will or any nominated Guardians of infant children
Remove or decrease the entitlement of a beneficiary who has not consented to the change or signed the Deed
Increase a beneficiary’s share without the consent of the beneficiary whose share would be reduced as a result
Alter the entitlement of a beneficiary who is under the age of 18 or who does not have sufficient mental capacity to understand the changes
Alter a legacy or bequest that has previously been changed by a prior Deed of Variation
Include any provisions that would be illegal under the general law
Change the income tax position of the Estate, prior to the date that the Deed was executed (see below)

Tax Implications

For inheritance Tax purposes and Capital Gains Tax purposes, the terms of the Deed of Variation will be treated as if they had been included in the Deceased’s Will at the date of their death and the tax calculated accordingly. This can sometimes result in less Inheritance Tax being payable (for example, if a charity benefits under the Deed) but could also potentially result in more Inheritance Tax being payable (if an exempt beneficiary gives up their share of the Estate). It is therefore essential that advice is taken before a Will is varied in case the changes result in additional tax becoming payable by the Estate.

For income tax purposes, the changes only take effect from the date that the Deed is signed. For example, if a beneficiary was gifted investments in the Will but varied the Will to give those investments to their adult child, then for income tax purposes the original beneficiary will still be taxed on all dividends and income arising from the investments in the period between the date of death and the date the Deed was signed.

Formalities

The Deed of Variation must be signed by every beneficiary whose entitlement will be negatively altered, in the presence of an independent adult witness. The Executors should also sign the Deed if the terms of the Deed result in any changes to the Estate’s Inheritance Tax liability.

The Deed must be dated within 2 years of the date of death, but subject to that, it does not have to be executed before the Estate is distributed.

In order to be valid for tax purposes, the Deed must state that the Taxation of Chargeable Gains Act 1992 and the Inheritance Tax Act 1984 shall apply to the document

If you would like assistance with drawing up a Deed of Variation, one of our team of Solicitors would be happy to contact you and discuss how best to help.

Contact Our Private Client Solicitors

For initial advice or to arrange a meeting with one of our team, please email privateclient@bishopandsewell.co.uk or contact 020 7631 4141 and ask to speak to the Private Client team.