Deed of variation

A deed of variation — also called a deed of family arrangement — is a document by which a beneficiary redirects all or part of what they have inherited to someone else.

Its value is in the tax treatment. If the conditions are met, the redirection is read back as though the deceased had made the gift, rather than the beneficiary making a gift of their own.

The conditions#

• Made within two years of the date of death
• In writing, and signed by the beneficiary giving up the entitlement
• Contains an express statement that section 142 Inheritance Tax Act 1984 and, where relevant, section 62(6) Taxation of Chargeable Gains Act 1992 are to apply
• Not made for consideration — money or money's worth cannot change hands in return
• All beneficiaries whose entitlement is reduced must agree

If any person affected is a minor or lacks capacity, court approval is needed — which usually makes the exercise impractical.

What it is used for#

Skipping a generation, where an adult child does not need the inheritance and their own children do. Correcting a will that was never updated. Making a gift to charity, which may reduce the inheritance tax rate on the estate from 40% to 36% where at least 10% of the net estate passes to charity. Resolving a family dispute without litigation. Redirecting to a spouse to use the spouse exemption.

Its limits#

It is a repair, not a plan. It depends on beneficiaries agreeing voluntarily at the worst possible moment, and the two-year window closes. Anyone relying on a deed of variation as their estate planning strategy is gambling on the goodwill and survival of people they will not be around to influence.

Advise clients accordingly — and note that governments periodically consult on restricting the relief.

Related#

Residuary estate · Intestacy rules · What is estate planning?