What are deeds of variation, when can they be used and are they simply mechanisms for mitigating tax?
A deed of variation is a device which can vary the terms of a person's Will after they have died. A deed of variation can also be used to alter the rules of intestacy, where a person has died without making a Will. If a beneficiary of an estate wishes to alter the interest he has received, he can do so by entering into a deed of variation within 2 years of the deceased's death. The variation is treated as being made by the deceased and is effective from the deceased’s death rather than being made by the beneficiary thereby allowing him to redirect all or part of his interest to another person or a trust.
There may be a number of reasons why a beneficiary might wish to redirect assets to which he is entitled from an estate. Often, if the beneficiary is already wealthy and does not need the assets, it is to mitigate tax. Rather than accepting the assets so that they form part of his estate, he can alter the deceased's Will so that the assets pass to other people, such as his children or grandchildren. In doing so he avoids either i) having to gift the assets to them during his lifetime, thereby preventing a potential inheritance tax charge arising if he does not survive for 7 years (and also, possibly, a capital gains tax charge arising if the asset has risen in value since the deceased’s death) or ii) an actual inheritance charge arising on his death, if the assets are still in his estate as at that date.
However, a deed of variation can also be used for other purposes such as varying the rules of intestacy when a person has died and left no Will. By using a deed of variation, assets can be passed as the family wishes, for example, to allow a widow to stay in the family home. Equally, where the deceased has left a Will but it contains mistakes or is out of date and circumstances in the family have changed, a deed of variation can be used to rectify errors. Deeds of variation are not, therefore, just tax planning vehicles but can be a lifeline for bereaved families at a difficult time.