Whilst it is certainly the usual case that a person’s testamentary wishes are set set in stone when making their Will, and those wishes are legally binding on their death, it may surprising to know that in certain circumstances it is possible to change the terms of a Will after the person who made that Will has died. This is called varying the terms of Will and is commonly known as a Deed of Variation.
Varying the terms may, however, not be the most accurate description for what happens here; it is not the case that anyone can simply change the terms of a person’s Will. It has to be done by the person who inherited under the Will and that person must want to change it. In doing so they ‘give up’ their inheritance.
You may think that it is odd that someone may choose to forego their inheritance under a Will, but it is actually quite common and can be used to make more beneficial family arrangements and also to possibly improve the inheritance tax position under an Estate.
A Deed of Variation can also be particularly useful in an intestacy (where someone dies who hasn’t made a Will) to pass the Estate to beneficiaries other than whom the intestacy rules dictate; again of course the crucial factor is that the person inheriting the estate must be willing and wanting to redirect it.
Are there inheritance tax benefits of a Deed of Variation?
A Deed of Variation can be used to alter the inheritance tax position on an Estate. If a person gives their inheritance to someone else for inheritance tax purposes, this would be treated as a gift by them. There are specific rules on gifting, but in a nutshell, a person needs to survive seven years from making a gift for this to be removed from their own Estate for inheritance tax purposes. By using a Deed of Variation, the gift can receive specific inheritance tax treatment, which in simplistic terms means that the gift is treated as if it was made direct from the deceased’s Estate, in effect cutting out the ‘middleman’. This can be used to beneficial effect. Sometimes a Deed of Variation is not the answer, and a gift by the ‘middleman’ may be better, but it can be a useful vehicle in many circumstances. A good example of this would be parents inheriting, but wanting to instead pass their inheritance down to their children or grandchildren, or if a beneficiary wants to make an onward gift to a charitable beneficiary.
How do I make a Deed of Variation?
It is always my recommendation for a Deed of Variation to made in writing as a Deed. There is a strict time limit for a Deed of Variation and this must be within 2 years of the date of death. It must also not be made for money or money’s worth. It can be a very technical area and it is important to take legal advice before embarking on a Variation.
What circumstances would a Deed of Variation be suitable?
A Deed of Variation can be used in most circumstances where a person wants to ‘give up’ or ‘pass on’ their inheritance under an Estate. It is possible to disclaim an inheritance, but this simply means that an inheritance goes back into the Estate and passes to the other, or replacement beneficiaries, whereas a Variation allows you to choose who the new beneficiary is. We see Deeds of Variation used where children inherit under an intestacy, but they want to pass the Estate back up to their surviving parent (often as a buy product to apply the spousal exemption for inheritance), or where the recipients think there may be more fitting people who need the inheritance or where parents want to pass on inheritance to children or grandchildren. It can also be used to good effect to claim a Residence Nil Rate Band on an Estate where the structure of the Will has not allowed for that.
A Deed of Variation can also be a useful tool for estate planning where, especially in the context of family business or farming business, an agreement is reached to direct a particular asset or say, a share in a business to specific beneficiary to enable them to continue with that business and perhaps to maximise inheritance tax reliefs available to the Estate.
It is important to note, that Deed of Variation is not always the solution, and, in some circumstances, it is not possible nor advisable. However, in the right circumstances it can prove to be a valuable legal tool and getting expert advice on this really is the key to getting the best outcome.
If we can help you in any way with varying an Estate you have inherited or you have any queries, then please do not hesitate to contact Jacksons’ Private Client Team on 01642 356500/0191 2322574.
