‘Deed of Variation – What, Why and When?’

‘Deed of Variation – What, Why and When?’

Not everyone wants to receive an inheritance. If you’d rather not accept a gift from a deceased person’s estate, there are other options you can pursue.

You could accept the inheritance and then give it away, but this might result in a tax liability. So, what are the alternative solutions?

There is the option to refuse or ‘disclaim’ the inheritance. If you disclaim an inheritance it remains in the deceased’s estate and is re-distributed. The problem with this is that you have no control over where the asset goes, and it could pass to someone who you would prefer not to receive it.

Another approach is to change the direction of the gift – this is called a ‘post-death variation’. UK tax laws allow post-death variations to be treated for tax purposes as if the changes to the inheritance had been in place from the deceased’s death.

Post-death variations have a double advantage if you don’t want an inheritance. You can avoid an adverse tax situation and retain control over where the inheritance goes.

There are conditions that apply to post-death variations. If the conditions are not met the tax advantages will be lost. For example, a variation must be 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 a share of an intestate estate. Another is that the Deed of Variation must be completed within 2 years of the death to qualify for exemption under the inheritance tax (IHT) and capital gains tax rules and must contain a statement that the tax exemption rules are to apply.

Some people may think the idea of refusing an inheritance doesn’t make a lot of sense, but there are several reasons why a deed of variation could make a lot of sense. People who already own substantial assets often want to re-direct an inheritance to avoid increasing the value of their own estates and so prevent IHT when they die.

Another reason might be to take advantage of certain reliefs or exemptions such as Business Property Relief (BPR). A deceased business owner leaving business assets to their spouse or civil partner, wastes any BPR because assets passing on death to a spouse or civil partner are tax exempt. A deed of variation re-directing qualifying assets to non-exempt persons avoids BPR being wasted.

Although there are many positive reasons for making a deed of variation, there are also some situations where it could be unwise. For example:

  • A beneficiary receiving state benefits who re-directs an inheritance to someone else could lose their means-tested benefits
  • A person receiving care funded by a local authority who re-directs an inheritance to another person risks falling foul of the ‘deliberate deprivation’ rules
  • If a deal is made that the original beneficiary is to receive something in return for giving up their inheritance the post-death variation will fail to qualify for tax exemption

Making a deed of variation can be very advantageous for some people so it’s worth getting it right. The window of opportunity is also relatively short so don’t take too long to make your mind up.

 

Rosamund Evans

Rosamund Evans

Owner & Principal Solicitor of Barker Evans Private Client Law

Rosamund Evans is an accredited member of Solicitors For The Elderly (SFE) and Regional Co-ordinator of the Nottinghamshire & Derbyshire SFE Group. She is the owner and principal solicitor of niche law firm Barker Evans Private Client Law which specializes exclusively in issues relating to the care of elderly and vulnerable people.

She holds the Diploma in Trust and Estate Administration (England and Wales) from the Society of Trust and Estate Practitioners and is a blogger and webinar presenter on a wide range of legal subjects relating to age and disability.

Rosamund regularly presents seminars for national and local organisations and has acted as a regional consultant for the learning disabilities charity Mencap.