Planning for the future can be complex, especially when considering tools like a Deed of Variation (DOV).
This powerful instrument allows beneficiaries to alter a will’s provisions posthumously, providing flexibility in asset distribution.
Here, we delve into what a Deed of Variation entails, its tax implications, and why it might be a strategic choice for your estate planning.
(Read Time: Approx. 3 minutes)
Topics Discussed:
- Key aspects and benefits of a Deed of Variation
- Tax implications associated with a Deed of Variation
What is a Deed of Variation?
A Deed of Variation (DOV) allows beneficiaries to change the distribution of assets in a deceased’s will.
This can redirect assets to different beneficiaries than those initially named in the will. Key points to remember include:
- Agreement Requirement: All affected parties must agree to the variation.
- Time Frame: The variation must be completed within two years of the deceased’s death.
- Documentation: The deed must be in writing but doesn’t need formal witnessing.
- Estate Administration: The estate’s administration doesn’t need to be complete for a DOV to be made. It’s not too late to use a deed if the administration is complete as long as it’s within the two-year time limit.
- Beneficiary Rights: Beneficiaries of a person who has died may make a variation redirecting that person’s entitlement on an earlier death, provided it is made within two years of the earlier death.
- Terminology: HMRC refers to DOVs as ‘Instruments of Variation’ (IOV).
Tax Implications of a Deed of Variation
A DOV can significantly impact inheritance tax (IHT) and capital gains tax (CGT) liabilities, often providing beneficial tax outcomes:
Inheritance Tax (IHT)
- Reading Back: The terms of the deed are read back into the will for IHT purposes.
- Transfer of Value: No separate transfer is created, so the transfer of value is considered made by the deceased. Relevant IHT reliefs can apply based on the deceased’s circumstances.
- Clauses for IHT: The deed must reference s.142(1) IHTA 1984 to apply the IHT benefits.
- No Consideration: There must be no cash incentives offered to beneficiaries to induce them into the deed.
- HMRC Notification: The DOV must be sent to HMRC within six months of its execution if it references s.142 IHTA and results in additional tax charges.
Capital Gains Tax (CGT)
- No Disposal: No CGT disposal occurs as the CGT disposal on death rules at s.62 TCGA 1992 apply.
- Clauses for CGT: The deed must reference s.62(6) TCGA 1992 to ensure CGT benefits.
- Beneficiary Gains: Beneficiaries become entitled to assets without CGT implications until they decide to sell the assets.
Income Tax
- No Reading Back: For Income Tax purposes, there is no reading back into the will.
- Estate Income: Any income earned from assets within the estate up to the point that the estate is distributed remains the income of the personal representatives and should be declared to HMRC, with tax paid accordingly.
- Beneficiary Income: Beneficiaries under the rewritten will become entitled to income from the assets of the estate once those assets have been legally transferred to them.
- Trusts Created by DOV: If a DOV creates a Will trust and the settlor(s) and their spouses/civil partners are not excluded from benefitting, the trust income will be taxable upon them.
Practical Uses of a Deed of Variation
Deeds of Variation can be particularly useful in estate planning to maximise tax reliefs and manage the distribution of assets efficiently.
Here’s a practical example:
Bill, a farmer, dies leaving his estate, including a farm eligible for Agricultural Property Relief (APR), to his financially independent widow Mary.
Given Mary’s disinterest in farming and her significant existing estate, a DOV is executed to transfer the farm to their son Matthew.
This move optimises the APR, preventing the farm from being taxed in Mary’s estate upon her death, ultimately saving £240,000 in IHT.
Planning and Pitfalls
Property Identification
Ensure that the property being redirected by the DOV is clearly identified at the date of death.
For example, where shares have been the subject of a reorganisation after death, the deed must identify the shares as they were at death but also set out what they became under the reorganisation.
Charity Involvement
Where property is redirected to a charity or registered club, those who execute the variation must show that the ‘appropriate person’ (charity, registered club or, if the property is held on trust, trustees) has been notified of the variation.
Jurisdiction Differences
Note that Scotland has different succession and survivorship rules compared to the rest of the UK, and legal advice should be taken if relevant.
Beneficiary Limitations
Only the original beneficiary can make a variation to which s.142 IHTA 1984 applies, meaning it is not possible to vary the disposition of property that has already been varied.
Minors and Capacity
Minors cannot make Deeds of Variation due to a lack of capacity.
Where a change in a minor’s interest is desired, a court would need to consent on their behalf.
Additional IHT
Where a DOV results in additional IHT, the personal representatives must also be joined to the instrument of variation.
The Future of Deeds of Variation
Despite ongoing speculation about the abolition of Deeds of Variation, they remain a valid and useful tool in post-death estate planning.
Their strategic use can provide significant tax benefits and ensure the wishes of the deceased are respected while offering flexibility to beneficiaries.
Summary
Drafting a Will with precise legal guidance is essential to avoid complications with charitable gifts.
If you intend to include charitable donations in your Will, ensuring your intentions are explicitly stated and legally sound is crucial.
At Help Me Legal, we specialise in estate planning and Will interpretation to make sure your charitable gifts are honoured exactly as you wish.
Take action now to secure your legacy and make a significant impact through charitable donations.
Contact Saara at Help Me Legal today.
Call us at 01772 282768, email Saara at saara@helpmelegal.uk, or reach out via WhatsApp at +447816848188.
Let us help you make your philanthropic intentions a reality.