Sometimes a Will may have been written many years before a death and family circumstances have changed significantly or the tax positions of family members are no longer the same.
What is a Deed of Variation?
A Deed of Variation (also known as a Deed of Family Arrangement) is a document available to beneficiaries of the estate of a deceased which allows them to redirect any gift they have received in a Will, in part or in whole, to other people. Once signed, the redirection under the Deed of Variation will be treated as having been under the Will from the date of death of the deceased.
Why would you want to make a Deed of Variation?
- The most obvious reason is to save tax. The Deed of Variation can utilise exemptions not previously thought about, such a business property relief, unused nil rate band or residential nil rate band or a 10% gift to charity to reduce tax on the rest of the taxable estate.
- As the redirection is treated as having been made under the Will, the original beneficiary can pass the gift down a generation, which will usually mean it is tax neutral and therefore a good tax planning tool.
- Where a taxable estate has been left to non-exempt beneficiaries, such as children, adult children can vary their gift in the estate to pass it back to the surviving parent in order to reduce or wipe out completely any inheritance tax liability.
- A Will may have excluded someone. A Deed of Variation could avoid costly court claims.
- The Deed can be used to vary the estate and take into account financial imbalance between the beneficiaries and pass on a larger share to those who need it more.
- The deceased’s unused nil rate band could be used to set up a discretionary trust which may provide for better tax planning for the original beneficiary.
- The Will may have drafted in such a way that there is uncertainty or a defect of some kind and the Deed can be used to rectify this.
What are the conditions for a valid Deed of Variation to be valid?
- The variation needs to be in writing and whilst it doesn’t have be under a formal Deed, this is the method normally used by the parties.
- The variation must be made within two years of death.
- The beneficiary ‘losing’ his entitlement needs to be party to the variation and often the executors to the Will are too. If the entitlement is being gifted to a charity, they will also need to be a party to it.
- The beneficiary losing his entitlement is not able to accept any form of incentive, whether financial or otherwise, to sign the document.
- The asset or part of the estate being varied and the new beneficiary must be clearly identifiable.
- Only adult beneficiaries can vary their entitlement as minor children are unable to consent to any variation of their share.
- The same asset cannot be varied more than once.
- There is a prescribed form of tax declarations which need to be included so that it is effective for inheritance tax and/or capital gains tax purposes.
NSS Legal can guide you through the benefits and procedures for preparing a Deed of Variation, taking into account the implications for tax purposes, family dynamics and overall tax planning for the parties involved.
This can also be a suitable time for the family members to review their own Will and affairs to ensure these are up to date and relevant.