Introduction
Figures
show that many of us will never make a Will. On top of that, for those that
do, many will fail to keep this under review and ensure it is updated and
revised regularly as their circumstances then change, both financially and
familywise. What this ultimately means is that when many people die, their estate
doesn’t pass to who they’d intended and can also be subject to a larger
inheritance tax liability than would otherwise have been necessary.
It is however
possible for those left behind after we’re gone to salvage this situation using
a Deed of Variation and in this article we look at what these are, how they
operate and consider some of those instances where using one might be
appropriate.
Deeds of Variation – what are they?
A Deed of Variation
allows a beneficiary of an estate to redirect their entitlement from that
estate to another person, without them suffering any tax implications. The
variation is effectively written back into the Will or the Intestacy Rules, as
if the gift to the nominated person had been made by the deceased. It is to be
distinguished from a Deed of Disclaimer, where the beneficiary simply gives up
their right to the gift and it instead passes to the next person entitled,
either under the Will or the Intestacy Rules.
The formalities
For a Deed of
Variation to be effective it must be in writing. It must also be made within
two years of the deceased’s death and signed by the person giving up their
entitlement. It will only need to be signed by the executors of the estate as well if
the variation results in more tax becoming payable. It must clearly identify
what assets are the subject of the variation and who is to benefit. Finally it
must contain a prescribed statement, specifying that the variation is to be
effective for inheritance tax and capital gains tax purposes.
It is also worth
pointing out that the original beneficiary giving up their entitlement cannot
receive payment in consideration for them doing this and, once executed, a Deed
of Variation cannot then be undone.
When might it be appropriate?
A Deed of Variation
is most commonly used to reduce the amount of inheritance tax payable. This is
generally in connection with the deceased’s estate, where assets can be
redirected to certain individuals or entities (charities) so as to take advantage of any
available inheritance tax reliefs. The tax saving however can also be for the
benefit of the original beneficiary. For instance a beneficiary who is already
a higher rate tax payer, wealthy in their own right and not in need of the
gift, may choose to redirect this so that it passes elsewhere and doesn’t form
part of their estate.
Another occasion
where a Deed of Variation might be suitable is if the deceased didn’t make a
Will and the Intestacy Rules don’t properly provide for their next of kin. This
is very often seen where the deceased was unmarried but had a long term
partner. Under the Intestacy Rules, that partner receives nothing and so a
variation can be used so as to redirect the estate to them, reflecting what the
deceased would have intended had they made a Will.
One final example is
where the original beneficiary wishes to provide for those with a greater need
than theirs. This might be their own children where, if they’re still young,
receiving a share of the estate might set them up for the rest of their life.
Alternatively if there is a family member with a disability or special care
needs, redirecting the gift to them might enable them to fund their ongoing
care or cover the cost of any specific equipment they need.
Conclusion
There really is no
substitute for making sure you have a Will and ensuring this is then kept under
review as your circumstances change. Ultimately this is the most reliable way
to ensure your estate passes to who you’d intended and that your estate isn’t
paying more inheritance tax than absolutely necessary.
That being said however, a Deed of Variation can provide a means of putting matters right in
those instances where changing the terms of the Will or not following the
Intestacy Rules are necessary. Therefore if you’re considering a Deed of
Variation for an estate you’re involved in or want to know more about this or
whether one might be appropriate, please give us a call on 01202 888 300 or
email us.