If you have just been given responsibility of handling a Will after a person’s death you may find that updates are needed or that an unnecessarily huge tax bill is now due.
“Do not panic” says our Contentious Trusts & Probate Team – it is still possible to make changes with a Deed of Variation, so long as a few rules are followed.You have two years to make these changes and any beneficiaries left worse off by the changes obviously need to agree. If there is no will (the person dies intestate) the law will decide who inherits but you can still make changes in the same way as if there is a Will.
A Variation is available to a beneficiary of a deceased’s estate who wishes to alter what they are entitled to receive which may consist of land, money, a share in the residuary estate or a beneficial interest in a Trust. A Variation works by allowing the beneficiary to re-direct their interest to another, usually by way a gift.
You may want to vary a Will to:
The beneficiary can choose to whom the Variation is made and the gift can have retrospective effect for IHT and Capital Gains Tax (CGT) purposes, provided it is made within two years of the deceased’s death. The Variation is a transfer of value for IHT purposes and a disposal of an asset for CGT purposes. However, if certain conditions are met, the transfer can be treated as having been made by the deceased rather than the beneficiary and avoid the tax charges on the beneficiary’s gift, subject to compliance with formalities of the Variation dealt with below. The Variation being interpreted as made by the deceased and effective from death offers the opportunity for retrospective tax planning.
All beneficiaries and personal representatives need to be party to the agreed Deed of Variation, including any individuals who lose out by the variation and changes being made. Once executed, it is binding on all parties.
The original beneficiary could gift their share of the estate without the formality of a Deed of Variation, but their gift would be the subject of the seven-year survivorship rule. Failure to survive for this period would require the gift being assessed for IHT as part of their estate upon their death.
The Deed of Variation must:
The original beneficiary must not receive a payment for the transfer or re-direction of their gift.
The Deed of Variation must indicate which asset is the subject of the Variation and contain a statement of intent that the beneficiary elects the relevant sections of the Inheritance Tax Act 1984 and the Taxation of Chargeable Gains Act 1992 to apply for the benefit of a retrospective tax saving.
It must comply with s142 of the Inheritance Tax Act 1984 (IHTA 1984) s62 of Taxation of Chargeable Gains Act 1992 (TCGA 1992).
A Deed of Variation does not mean that you avoid tax, but you may gain the advantage of tax relief. Any changes in the Deed of Variation are treated as if the deceased had written them into the original Will.
Once the Deed of Variation has been completed it cannot be undone and it is important that the accuracy of the Deed of Variation is ensured before execution. For this reason, such documents should always be drafted after specific legal advice by a specialist solicitor.
The original beneficiary to the disposition must make a Variation and indicate their agreement to re-direct their entitlement. They must be at least 18 years old. The Personal Representatives of the deceased will need to be a party to the Deed of Variation where the Variation increases the overall rate of IHT or makes it payable by another beneficiary.
Variations may be used to secure a lower 36% rate of IHT for Testator’s who leave 10% or more of their net estate to charity.
As there is no retrospective treatment of Variations for income tax, income arising during the administration of the estate and after the date of Variation, it is subject to the same income tax rules as an estate whose distribution has not been varied. A Variation is only effective from the date it is executed and the original beneficiary is assessed on the income up to the date of the Variation whilst the new beneficiary is assessed on the income after the date of Variation. An assessment will be made depending upon the nature of the legacy i.e. pecuniary (general) or specific, when interest is payable, and whether the recipient is the original or new beneficiary.
Deeds of Variation can have their benefits, particularly for tax relief or to avoid costly litigation where an alternative agreement or arrangement is capable of being negotiated.
Our Private Client and Contentious Trust & Probate Teams can help in these areas, depending on what stage of negotiations you are at. Please contact our specialists to discuss your situation in more detail.
The contents of this article are for the purposes of general awareness only. They do not purport to constitute legal or professional advice. The law may have changed since this article was published. Readers should not act on the basis of the information included and should take appropriate professional advice upon their own particular circumstances.