Deed of Variation or Post Death Variation.
A Deed of Variation has the effect of writing the provisions of the variation into the terms of the deceased’s Will or the intestacy for tax purposes, at the time of death. The estate is then charged Inheritance Tax based on the variation. The beneficiaries and trustees of a deceased’s estate may wish to rearrange the disposition of the estate for a number of reasons. The main ones being either to redirect assets to those who are less provided for or to save tax, in particular Inheritance Tax. To achieve the desired writing back effect that a variation can provide the beneficiaries must complete the deed of variation within two years of the deceased’s death. Contact us to discuss a Deed of Variation, but first download and complete the Deed of Variation enquiry form to the right. Obviously, we can also help with obtaining probate in the first place.
If the deed of variation results in additional IHT being payable by the estate then the personal representatives dealing with the estate must also join in this statement but they can only refuse to do so if there are not enough assets to meet the additional liability.
If a statement to this effect is not given, the redirection of assets will be classed as a PET (potentially exempt transfer – a potentially taxable gift) by the beneficiary or a transfer of value on which further Inheritance Tax may be immediately payable.
The position for Capital Gains Tax is similar; a special statement must be made within the deed of variation. Although no CGT is payable on death, the inclusion of such a statement prevents the redirection of assets being classed as a disposal by the beneficiary. Because of the necessity to include a statement as to the writing back effect it is entirely possible to elect not to use this effect.
If a statement is not included as far as IHT is concerned, then the property is treated as having passed to the original beneficiary who is then classed as making a PET. That means that if he or she survives for seven years then the transfer will normally become fully exempt. However, if she/he dies within the seven year period then (extra) IHT will become chargeable. The effect of using the statement within the deed of variation depends on several factors such as whether the original or new beneficiaries are exempt.
What can be varied in a Deed of Variation?
It is possible to vary ‘any of the dispositions (whether effected by Will, under the law relating to intestacy or otherwise) of the property comprised in the estate immediately before death’ (IHTA 1984 s142). A Deed of Variation can even be used where an asset passes outside of the estate. For example; where property is held as joint tenants and has passed by survivorship to the surviving co-owner the co-owner can elect to vary this effect by carrying out a retrospective severance. There are assets which cannot be the subject of a variation. These include any property in which the deceased had an interest in possession or property to which the deceased was classed as having an interest by the application of the reservation of benefit rules. Both of these may attract IHT on death but are specifically excluded from being the subject of a deed of variation by S142.
Income tax and deeds of variation
There are no specific income tax provisions equivalent to the IHT and CGT provisions. This means that income received by the original beneficiary prior tothe variation will be taxed as income of the original beneficiary even if the entire income received since the date of death is given up.
Contact us if you feel a deed of variation might be appropriate – an initial chat is free. Please remember that we are a business, and whilst we are always happy to have a brief exploratory chat, we do charge (modestly) for our time.