Deed of Variation
Limitations and drawbacks on the use of deeds of variation
Perhaps the last resort in Inheritance Tax planning is the deed of variation. Deeds of variation are an essential tool where a family finds that the terms of the deceasedís Will (or intestacy) have an undesired effect. Where all affected beneficiaries are in agreement, it is possible to vary the Will in order to create a better result.
There are a few conditions to be met and formalities to be observed but, basically, the family (or other beneficiaries) simply need to record the desired variations in writing within two years of the deceased’s death.
However, whilst a great deal of IHT planning can be put in place through a deed of variation, it is unwise to assume that it is a ‘cure for all ills’: as the mechanism does have a few critical limitations!
Variations made under a deed of variation effectively rewrite history and are treated as if they had been made by the deceased – but only for IHT!
For Capital Gains Tax and Income Tax purposes, the original beneficiary (under the deceased’s Will or under the laws of intestacy) is regarded as having made a transfer to the new beneficiary, or to any trust which receives property under the deed of variation.
This could result in the creation of a settlor-interested trust or may invoke the settlements legislation where the new beneficiary is a minor child of the original beneficiary. In either case, there is a significant risk of tax charges falling on the original beneficiary.
As explained in the accompanying article, it appears that a deed of variation cannot be used to increase the level of charitable legacies made by the deceased in order to benefit from the reduced rate of IHT applying where 10% or more of the ‘net estate’ is left to charity.
Furthermore, in a recent case, it was held that a deed of variation which put a charitable legacy in place was invalid in any case.
Lastly, a deed of variation requires all affected beneficiaries to agree, so there is always the risk that someone could be ‘awkward’ and stand in the way of what is best for the family as a whole.
In short, whilst deeds of variation can be extremely useful, it generally makes far more sense to sort out your IHT planning yourself while you still can!