There are two sorts of Deeds of Variation, also known as Deeds of Family Arrangement. If it is needed to save Inheritance Tax, then you need to act quickly or you may not
get the benefits anticipated. A (post death) Deed of Variation has the effect of writing the wording of the Deed into the terms of the deceased’s Will or the intestacy (no valid Will) to save tax, to skip generations or for other reasons such as fairness. So they are effective, retrospectively, to the time of death. The estate is then charged Inheritance Tax based on how the deed has revised the arrangements. Very often, Wills are not reviewed with professional advice, and the standard “logic” of leaving yet more money to elderly people who don’t need or want more is not reviewed regularly.
The beneficiaries and trustees of a deceased’s estate may wish to rearrange the distribution of the assets for a number of reasons. The main ones are either to redirect assets to those who are less well provided for or to save tax, in particular, Inheritance Tax. To make the desired tax saving that a variation may be able to offer, the beneficiaries must complete the post-death variation within two years of the deceased’s death.
Contact us to discuss Deeds of Variation and whether it is right in the circumstances – some are totally unnecessary and of no real benefit! Obviously, we can also help with obtaining probate in the first place. Ideally, the deed would be organised at the same time as probate, but it isn’t crucial (though the time limits are).
If the deed of variation results in more Inheritance Tax being payable by the estate then the personal representatives (executors) dealing with the estate must also join in this statement. The executors can only refuse to do so if there are not enough assets to meet the extra liability.
If a statement to this effect is not given, the redirection of assets will be classed as a Potentially Exempt Transfer (PET) by the beneficiary or a transfer of value on which further Inheritance Tax may be payable at once. (A PET is a potentially taxable gift. No immediate tax, but extra IHT could become payable in certain circumstances.)
Links to pages on different aspects of deeds of variation are below the main text of this page. You are welcome to give us a quick ring on https://www.theprobatedepartment.co.uk/contact-us-for-probate-help (or use the contact form below) to see if a deed of variation might be worthwhile. It is a rather technical subject! Bear in mind that it is essential that any possible claims against the estate are considered in order to avoid future complications: we won’t know about them unless you tell us!
Deed or Post Death Variation and Capital Gains Tax – changing a will after death
The situation 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 taken as a disposal by the person who would otherwise have received them. Because of the necessity to include a statement as to the writing back effect, it is entirely possible to use this aspect only where it is beneficial.
If a statement is not included as far as IHT is concerned, then the property is treated as having passed to the original beneficiary. The beneficiary is then classed as making a gift (a potentially exempt transfer or PET.) That means that if he or she survives for seven years then the transfer will normally escape more tax. 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 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 about intestacy or otherwise) of the property comprised in the estate immediately before death’ (IHTA 1984 s142). Deeds of Variation can even be used where an asset passes outside of the estate. For example; where a property is held as joint tenants and has passed automatically to the surviving co-owner then the co-owner can choose to vary this effect by carrying out a retrospective severance. The effect of this severance is that the whole property does not automatically pass to the survivor. It may be better for the deceased share of the property to go into a trust for example.
There are assets that cannot be the subject of a deed of variation. These include any property in which the deceased had an “interest in possession.” Also property to which the deceased was classed as having an interest in the application of the “reservation of benefit rules”. Both of these may attract inheritance tax on death. But they are specifically excluded from being the subject of a post-death variation by section 142. In effect, they are the result of Inheritance Tax planning not being up to date at the time of death.
Income tax and deeds of variation
There are no specific income tax provisions equal to the Inheritance Tax and Capital Gains Tax provisions. This means that income received by the original beneficiary before the deed of 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 variation might be right for you – 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. For details of the likely cost, let us have details of the situation and we’ll find you a sensibly priced service. Or use the enquiry form below..
Deed of Variation Cost: changing a Will or Intestacy
How much does it cost (or post-death variation of a Will or Intestacy)? Something of a piece of string job! For a reasonably straightforward deed, we currently find we can organise them from £350 + VAT as at February 2021. And most are straightforward. That doesn’t include any conveyancing or the creation of trusts.
Provided all of the affected beneficiaries are in agreement, and they are all over 18, the deed of variation can be in the post to you within days (in an emergency, if the 2 year limit is too close for comfort and our recommended solicitor is available, even faster!) If IHT is involved, less than 6 months is preferable.
The basic fee is for a straightforward instrument of variation, where the input of a tax barrister is not crucial. If there are tax issues, let us have the details and we’ll be happy to give you a more accurate idea of the cost. Just don’t forget that it MUST be signed by the relevant people within two years of the persons’ death.
Many people will wish to use the deed of variation to create a Family Bank® by transferring property or assets into a special trust which can underpin future generations for as much as 125 years. The cost is significantly more, as you would expect, but the benefits range from future Inheritance Tax savings, the removal of probate costs and delays and growing financial independence for your children and grandchildren. If you would like to read more about The Family Bank®, click the link.
The cost of delay:
If you would like to discuss the possibility of a deed of variation, it is one thing where not delaying is absolutely crucial. There is a strict time limit after which such deeds are no longer able to save tax, so the sooner the better.
We can arrange advisers to turn around simple Deeds Variation very quickly, but it can take some time to gather all the necessary information for more complex cases. In the cases where beneficiaries under the age of 18 or without full mental capacity are affected adversely, Court permission may be required which costs more and takes longer.
What is a Deed of Family Arrangement
A deed of family arrangement or deed of variation (main page) does exactly what it says – a way of the family rearranging the proceeds of the Last Will after the person has died. They are not templates, deeds of family arrangement are specific to every situation, and if they are not correct the consequences can be unfortunate. Anyone who loses out must agree and not be compensated, but children and those without mental capacity may well require Court approval to agree to a deed of family arrangement.
Why use a Deed of Family Arrangement?
1) To Save IHT
The classic scenario is Mum leaves everything to her two children, because she made the Will 50 years ago when they were kids. Mum is reasonably well off, but both the “kids” are now pretty wealthy (and retired) and have no need of an extra £200,000 each. In fact, if they inherited it, they would pass it on to their children, thus creating a potential liability to Inheritance Tax if they die within seven years.
Then to make matters worse, the grandchildren decide their kids need it more and pass it straight on to Mum’s great-grandchildren. So we have potential tax liabilities on the first death (which we will ignore as it is probably too late to sort that out), then on the gift from the children to the grandchildren, then on the gift to the great-grandchildren. So £100,000 could become £60,000 which could become £48,000. Not great planning to have that sort of potential liability for no good reason!
What a deed of family arrangement does is allow the children to retrospectively change Mum’s Will so (for example) the money could be split between the grandchildren and the great-grandchildren. This avoids increasing the potential tax bills if either the original inheritors, the children, should die within 7 years.
2) To avoid loss of family assets.
Sometimes a big inheritance can precipitate the end of a marriage as the non-family partner sees a pot of gold and tries to take away half of it to start a new life with. Or maybe the widow of a family member needs help, but the family wish to avoid her passing the inheritance on to a new husband. A deed of family arrangement, in the right circumstances, can transfer the assets into a trust which can LEND money to the widow, interest-free but repayable on demand. She is then supported by the family money as long as she needs to be, but will have to repay it on death or perhaps if she gets a new partner, and the repayment won’t damage the grandchildren – who will probably inherit it in due course.
Exactly the same procedure can often be used to look after family members who are on benefits (which would otherwise be lost) or perhaps a member in financial difficulties whose inheritance would otherwise be lost to creditors or care fees.
A deed of family arrangement (same as a deed of variation) must be completed and signed within 2 years of the death and (where relevant) a copy given to the taxman. So it is not something to start at the last minute and expect it to be easy. In some cases, it will be necessary to get Court permission for a deed of family arrangement: for example where any beneficiaries under the age of 18 are affected who do not actively benefit. Similar problems will arise where a beneficiary does not have the ability to make their own decisions.
Charitable Deed of Variation – a cheap form of giving
The Government allow extra inheritance tax (“IHT”) relief for people leaving at least 10% of their net free estate on death to charity (“the 10% Test”) with the intention of increasing charitable giving. If not in the Will, then the same thing can be accomplished through a deed variation.
As has always been the case, the gift to charity is completely free of IHT. However, the effect of the new relief (“the Relief”) where it applies is that the rest of the deceased’s net free estate going to the testator’s non charitable beneficiaries bears IHT at the lower rate of 36%, instead of at the normal IHT rate of 40%.
For deaths on or after 6 April 2012, there can be an extra advantage to using a charitable Deed of Variation to make donations to a charity from a deceased persons’ assets. Costs do vary depending on complexity but there is a guide here. Strangely, the larger the percentage gift, the more straightforward the process, at least for Charitable Relief on its’ own.
Gifts to charity have always been free of Inheritance Tax, but this new charity relief extends the advantage to the NON-charitable beneficiaries if the necessary condition is met. The gift can be contained in the Last Will or be added after death by way of a charitable deed of variation.
What you have to do is to leave 10 per cent or more of the deceased person’s net estate (after deducting IHT exemptions, reliefs and the nil rate band) to charity.
The rest of the estate can then benefit from a rate of Inheritance Tax from 40% to 36%.
Let’s take us an estate with a taxable amount of £1,000,000 (we have ignored the Residential Property Nil Rate Band to keep things simple.).
Inheritance Tax would normally be £400,000 leaving £600,000 for the beneficiaries.
Leave £100,000 (10%) to charity which leaves a taxable amount of £900,000 which is then taxed at the rate of 36%:
£900,000 less 36% (which is £324,000) leaving £576,000 for the beneficiaries.
So your charitable deed of variation has allowed you to make a charitable gift of £100,000 at a cost of just £24,000. (Update – under current tax rules, such a variation can be even more profitable for all concerned – see below.) Even with our very modest fee, of course!
Here is the HMRC information on the topic:
Inheritance Tax: Reduced Rate for Estates Leaving 10 Per Cent or More to Charity.
Who is likely to be affected?
Primarily people who are considering leaving, or who have already left, a charitable legacy in their will. The personal representatives of people who have died and the beneficiaries of their estates may also be affected. Solicitors, estate practitioners, accountants and other professional advisers who deal with or advise on wills, estates and inheritance tax (IHT) will also be affected.
General description of the measure
Legislation was introduced in Finance Act 2012 to provide for a reduction in the rate of IHT from 40 per cent to 36 per cent where 10 per cent or more of a deceased person’s net estate (after deducting IHT exemptions, reliefs and the nil-rate band) is left to charity. The measure applies to deaths on or after 6 April 2012.
Policy objective
This policy supports the Government’s aim to encourage charitable giving, promote greater philanthropy, and links to the Government’s objective of fairness in the tax system. The aim of the policy is to act as an incentive for people to make charitable legacies, or to increase existing legacies, and so increase the amount charities receive from estates.
The option is available for deaths on or after 6 April 2012
On death, IHT is charged on estates where the net value is more than the IHT threshold or ‘nil-rate band’ (currently £325,000 but the amount available for use by an estate can be different in some circumstances).
A person’s estate for IHT purposes includes not only the assets that they directly owned immediately before their death and which they are able to dispose of under the terms of their will (their ‘free estate’) but also certain other assets and property. These include jointly owned assets which pass automatically to the surviving joint owner, interests in certain types of trust (settled property), and some other assets which the individual gave away during their lifetime whilst continuing to derive a benefit (gifts with reservation of benefit). All these different categories of assets combine to form an aggregate estate that is subject to IHT.
Conflicting Advice on Deeds of VariationCharitable Deed of Variation
Deed of Variation or Post Death Variation or Deed of Family Arrangement.
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