Cohen Knights

Deed of Variation

What is a Deed of Variation and how this can help with Estate Management

After someone dies, their affairs need to be administered in the normal way and everything they own distributed to the beneficiaries.  The way in which the Estate should be distributed will be either set out in the terms of the Will, or if there is no Will it will be determined by the Rules of Intestacy.

There may be circumstances following a death where the beneficiaries in the Will wish to re-direct the way in which the Estate is distributed.  This would mean that the distribution of the Estate no longer aligns with the terms of the Will.

It is however possible to vary a Will through a deed of variation and there are a number of reasons why a family might want to do this. This allows the deceased’s assets to be redirected by the original beneficiary to another of their choosing. 

A beneficiary may want to do this in order to provide for an individual who has greater needs then them.  The beneficiary named in the Will may be well established in life but may have children who would benefit from receiving a share of the estate. 

The original beneficiary may decide to reroute funds direct to the next generation for tax purposes.

A deed of variation must be completed within two years of death then, as long as statutory conditions are complied with, the variation takes place retrospectively for inheritance tax and capital gains tax purposes. The effect is that it is as if the deceased left their estate direct to the new beneficiaries named in the Deed of Variation.

For initial guidance about Deed of Variation call our advisors in Norfolk and Suffolk on 0333 1300 509 or contact us online and will help you.

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A question we are often asked is, “Why do I need to complete a deed of variation, can I not just re-direct my inheritance without the deed of variation”? Yes of course, the original beneficiary could simply hand on his/her share to another without making a deed of variation, but this would be regarded as a lifetime gift by the original beneficiary and would be subject to the seven-year survivorship rule.  If that individual failed to survive 7 years, this would lead to the gift being assessed for inheritance tax as part of the estate of the original beneficiary and tax may be payable as a result of not completing a Deed of Variation. 

An example of why a deed of variation might be effective: –

Mr Jones is an only child and his mother recently died leaving her estate to him.  His mother’s estate was worth £300,000.  Mr Jones is a divorcee and already has a personal estate of £550,000 so he is already over his personal inheritance tax allowance.

If Mr Jones receives a further £300,000 (from his mother’s estate) his own personal estate would increase to £850,000.  Therefore, upon receipt, he would have an additional £120,000 (40% of £300,000) of inheritance tax to pay on his death (on top of his current inheritance tax liability).

Mr Jones has two daughters who are struggling and need assistance now, therefore if Mr Jones completes a deed of variation, he could allow his daughters to share his late mother’s estate which in turn removes the additional inheritance tax liability from his own personal estate, saving £120,000 in tax.  Furthermore, if the deed of variation redirects his late mother’s estate into a discretionary trust, his daughters could benefit from the money now and it also protects the money in case either daughter becomes divorced or bankrupt.