Deed of Variation – changing a will after death
What is a deed of variation?
If you want to change someone’s will after death you’ll probably need a deed of variation. Here’s why…
No one is obliged to accept an inheritance they don’t want. If you don’t want an inheritance you can just give it away after you’ve received it. But in that situation, you would be making a gift and that might land you or your estate with a tax bill.
You could refuse to accept the inheritance from the estate. This is known as a ‘Disclaimer’. But if you disclaim the gift you have no control over where it ends up. The inheritance just falls back into the estate to be re-distributed. It could pass to someone you would prefer didn’t receive it.
So what’s the solution?
You could use a deed of variation to change the deceased person’s Will.
UK tax laws allow what are called ‘post-death variations’ to be treated for tax purposes as if the changes were already in place on the day the person died. This means you can re-direct an inheritance without it being treated as a gift made by you.
There are various types of post-death variations that can qualify under the tax rules however, there are conditions that apply. If the conditions are not met the tax benefits will be lost so it’s really important to get any post-death changes right.
One of the conditions is that the changes must be made in writing. The document is usually referred to as a Deed of Variation and can be used to make post-death changes to a Will or to re-direct entitlements where there is an intestacy.
What should a deed of variation include?
A deed of variation must be completed within 2 years of the death to qualify under the inheritance tax and capital gains tax rules.
It should also contain a ‘statement of variation’ that the parties to the document intend Section 142(2) IHTA 1984 and (where appropriate) Section 62(2)TCGA 1992 to apply to the variation.
These are the pieces of legislation that allow you to re-direct an inheritance without it affecting your own tax position.
How can a deed of variation save tax?
A deed of variation can be very effective in reducing tax. :
♦ Tax reliefs – one of the commonest reasons for re-directing an inheritance is to reduce tax on the deceased’s estate.
Some business assets qualify for an inheritance tax relief called Business Property Relief. A deceased business owner who leaves business assets to their spouse or civil partner wastes the Business Property Relief because all assets passing to a spouse or civil partner are exempt from inheritance tax. So the family might want to re-direct the assets qualifying for Business Property Relief to another non-exempt family member instead.
Other reasons to use a deed of variation
♦ Family members in need – if the deceased’s intended beneficiary doesn’t need the gift, he or she might want it to pass to another person who does need it. For example, parents might want to re-direct an inheritance to their children.
♦ Re-direct to a family trust – family members of the deceased might want to re-direct an inheritance to prevent it going directly into the hands of an inexperienced or vulnerable relative. For example, Granny Smith leaves £50,000 in her Will to her grandson. He has a learning disability and his family fear other people might take advantage of him. The family may be able to use a deed of variation to re-write the terms of Granny Smith’s Will to include a trust for her grandson into which his inheritance is paid.
♦ Change joint ownership of land post-death – a deed of variation can be used to change the way jointly owned property is inherited. Property that is owned as joint tenants in equity passes by survivorship to the remaining co-owners but this might not be what the surviving co-owners want. They can re-direct the deceased’s share elsewhere by changing the joint tenancy and making a deed of variation. You can read more information on jointly owned property and changing a joint tenancy in our Guide to Co-ownership.
When shouldn’t you use a deed of variation?
There are some situations where a variation of a Will or intestacy would be unwise.
♦ Means-tested benefits – if a beneficiary is receiving or applying for means-tested benefits and he or she re-directs their inheritance to someone else, this is likely to breach the disclosure rules. It could make them ineligible for certain benefits or even liable to prosecution, in some cases.
♦ Local Authority funded care – a person receiving local authority funded care or who is likely to be applying for LA funded care in the foreseeable future, shouldn’t re-direct an inheritance away from him or herself. Doing so risks being accused of deliberate deprivation of a valuable asset with the intention being eligible for public funded care.
The deed of variation might be set aside by the courts or the person who receives the re-directed inheritance may have to pay the care fees instead.
♦ Giving something in return – if there is an attempt to enter into an arrangement whereby the person giving up their inheritance gets something in return this will fall foul of Section 142(3) Inheritance Tax Act 1984. The variation will risk being regarded as an attempt at tax abuse. There are statutory powers that enable HMRC to investigate any arrangement they suspect is not a genuine variation.
♦ Re-directing a minor beneficiary’s inheritance – variations need the consent of the beneficiaries affected by them. In the case of an under 18 year old, the child can’t legally give consent to their inheritance being taken away or reduced. If such a change is required it will need the approval of the court.
♦ Mentally incapacitated person – in the case of an adult who doesn’t have the necessary mental capacity to make their own decisions a deed of variation can’t be used to deprive them of an inheritance. If it would be of benefit to a mentally incapacitated person to have their inheritance re-directed to a trust it may be possible to do that if the Court of Protection agrees.
An application to the Court of Protection would be required and the court would have to consider whether it would be in the best interests of the incapacitated person for them not to receive their inheritance.
Is a Deed of Variation a substitute for estate planning?
Deeds of Variation offer the opportunity to ‘put things right’ or ‘fine tune’ adverse effects of a deceased person’s Will. A deed of variation can also be used to change the effects of an intestacy situation. These documents are therefore very useful tools but so much more can be achieved using well-constructed, pre-death estate planning.
Our estate planning services help clients put in place Will and trust arrangements that are flexible and easily adapt to future changes in tax laws and family circumstances.
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