A deed of variation can be used to change the provisions of someone’s Will after they have died. This can be used to distribute their assets in a different way in order to reduce the amount of Inheritance Tax (“IHT”) that will be payable or to make provision for someone who was not included in the Will.
All of the beneficiaries who would be affected will need to consent to any changes that are made.
A deed of variation can be made by the beneficiaries under a Will or alternatively, if no Will was left, by those who would inherit under the Rules of Intestacy, which govern who will receive a deceased’s assets if they did not have a Will.
Variations made by such a deed are treated for IHT purposes as if they had been made by the deceased. This means that a beneficiary who gives up a right to all or part of their inheritance is not themselves regarded as having made any transfer of value.
Reasons for using a deed of variation to change a Will
If a Will was made a long time ago and the beneficiaries know that the deceased’s wishes had changed, they may be prepared to sign a deed of variation to direct the estate funds to those whom they know the deceased would have wanted to provide for.
For example, where the deceased had a new partner whom they would want to have left something to or if they excluded someone from their Will over a temporary disagreement but had since made up, that person could be included by way of a deed of variation. It could also be the case that a new grandchild has been born who was not included in the original Will and the beneficiaries would like them to receive something.
Where one of the beneficiaries needs the money more than others, they may agree to change the amount left to each. This could also prevent a dependent relative from bringing a claim under the Inheritance (Provision for Family and Dependants) Act 1975. Any legal claim against the estate could be time-consuming and expensive and prevent the estate administration from being concluded. By settling the matter with a deed of variation, it could be beneficial to all involved.
Where no Will was left
A deed of variation can be used to provide for someone who would not otherwise inherit anything because the estate is passing under the Rules of Intestacy. This could be a cohabiting partner or a stepchild, who would not otherwise be entitled to anything.
Changing the Will can also prevent Inheritance Tax from being paid twice on the same money in short succession. By way of illustration, if someone left money to their spouse, who in turn intends to leave it to their children, by executing a deed of variation to pass it directly to the children it may be possible to reduce the amount of Inheritance Tax payable.
Deeds of variation may be used to create one or more trusts or to use other planning techniques to reduce IHT on the deceased’s estate.
Gift to Charity
Another way to reduce the amount of Inheritance Tax payable is to leave 10 per cent of the net estate to charity. This will reduce the level of Inheritance Tax from 40 per cent to 36 per cent. As well as being of substantial benefit to the charities involved, the beneficiaries may only receive slightly less than they otherwise would have done.
Making a deed of variation
This can be done before the application for probate is made, but could also be done after the estate has been distributed. Where it is intended to reduce the amount of Inheritance Tax payable, it must be done within two years of the date of death.