A Deed of Variation: What Is It and How Does it Work?
In the world of UK law and estate planning, a Deed of Variation can be invaluable for beneficiaries looking to manage their inherited assets.
Although you can’t rewrite a person’s Will after they have died, there are options if you wish to change what you are entitled to if circumstances have changed since the Will was written.
A Deed of Variation is a legal document that allows you to alter the terms of a will after the death of the testator. But what circumstances would call for a Deed of Variation? And how does a Deed of Variation work? That’s what we’ll be exploring in this blog post.
Read on to find out what a Deed of Variation is, and how to write a letter of variation to a Will. We’ll also be exploring the tax implications of a variation.
What is a Deed of Variation?
A Will is a way for a person to document their wishes - for example, how they want their assets/ estate to be distributed.
However, circumstances can change when we least expect it. The Will may not be the best option for the beneficiaries involved. This is why people opt for a Deed of Variation.
A Deed of Variation is a legal document executed to amend the terms of a deceased person's Will or intestacy after their death. This allows beneficiaries to redistribute the deceased's assets among themselves in a different way from what was initially stated.
The main purpose of this variation is to address changing circumstances or to make the estate distribution more tax-efficient. For example, property gifted to a certain beneficiary may be used for another purpose through a Deed of Variation.
One of the key benefits of a Deed of Variation is that it enables beneficiaries to make amendments within two years of the death without incurring negative tax consequences.
This flexibility makes it valuable for families looking to adapt to unexpected circumstances or to make the distribution of assets more tax-efficient.
When is a Deed of Variation Needed?
There are several reasons why a Deed of Variation may become necessary. The key reason to opt for a Deed of Variation is to alter the terms of a Will or intestacy.
Sometimes, a Will has not been rewritten to account for changed circumstances - or the intestacy rules/ rules of intestacy mean that any changes would not reflect what the deceased person would have wanted.
A beneficiary may not wish to inherit anything - for example, they may want the assets to go to somebody more deserving.
This legal document allows beneficiaries to rearrange the distribution of the estate in a way that suits their circumstances better.
Some common scenarios that may require a Deed of Variation include:
- Tax Planning - beneficiaries may use the deed to optimise Inheritance Tax implications by redistributing assets among family members.
- Providing for Dependents - if the original will does not adequately provide for dependents, a Deed of Variation can be employed to ensure fair and reasonable financial provision.
- Equalising Shares - beneficiaries might decide to redistribute assets to achieve a more equitable distribution among heirs.
- Changing Executors or Trustees - the deed can also be utilised to modify the appointed executors or trustees if circumstances change or if the original choices are unable or unwilling to fulfil their roles.
How to Write a Letter of Variation to a Will
Because a Deed of Variation is a legal document, there are several legal requirements to meet for the deed to be considered valid.
To be legally effective, a Deed of Variation must be executed by all the beneficiaries. According to the Inheritance Tax Act 1984 and the Taxation of Chargeable Gains Act 1992, a letter of variation must:
- Be signed by all beneficiaries involved
- Include a statement of intent
- Clearly outline the amendments being made
- Be made on behalf of a beneficiary who is of sound mind and over the age of 18
- Explicitly state that it is intended to vary the original disposition of the deceased's estate
It can take anywhere between two and four weeks to prepare the letter of variation. However, some parties disagree, the process can take much longer.
If any of the beneficiaries don’t have the capacity or are minors, the next step to take is to make an application to the court. This can also slow down the process.
Once all parties have signed the deed, and the variation meets all the requirements, the document is legally binding.
You may be wondering how much a Deed of Variation costs. There is no fixed answer for this as each case is unique - however, you should expect to pay over £500 + VAT for a simple Deed of Variation.
The Benefits of a Deed of Variation
There are many potential advantages to a Deed of Variation. First and foremost, it gives beneficiaries a higher level of control of the person’s estate. It allows them to distribute their assets however they see appropriate.
Another added benefit is timing. A Deed of Variation can be made after the process has been finalised, or during the administration process. This means that you can draw up a letter of variation after assets have been transferred.
If you pass an inherited asset to another person without this variation, it would be seen as a gift from the original beneficiary to the current beneficiary. This could have Inheritance Tax (IHT) implications.
The Tax Implications of a Deed of Variation
A deed of variation can be beneficial in terms of tax. First of all, with a Deed of Variation, you can maximise relief and exemptions.
If, for example, you would like to give away your inheritance but don’t want it to count as a taxable gift, a deed of variation can make this possible.
However, you must complete the deed of variation within two years of the date of the death. Additionally, you can make a gift to charity. This will reduce the Inheritance Tax due.
A Deed of Variation can not only have Inheritance Tax advantages but Capital Gains Tax advantages too.
You must inform HMRC of the variation if it results in a higher amount of Inheritance Tax payable. However, if there is no extra tax or if the tax liability has decreased due to the variation, then you will not need to send a copy to HMRC.
At Bell Lamb & Joynson, we recommend seeking legal advice when considering a Deed of Variation. This is something we can assist with.
Our Wills and Probate solicitors can ensure compliance with UK inheritance law. We understand that bereavement can be difficult, which is why we offer a sympathetic ear alongside our legal services.