Deed of Variation

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Many people are aware of the ability to prepare a Deed of Variation following the death of an individual. However, their use can be wider than initially imagined.

A Deed of Variation is prepared in circumstances where the beneficiary under the terms of somebody’s Will, or under the Intestacy Provisions, decides that he or she wishes to redirect some, or all, of his or her inheritance. The reasons for redirecting part of the Inheritance are likely to vary, but for many it is part of an Inheritance Tax planning strategy.

It is important to remember that the original recipient is still the person making a gift, and that they must be put in place within two years of the individual’s death to benefit from the potential tax advantages.

A Deed of Variation cannot be used to circumvent the rules regarding deliberate deprivation of assets, as it is still a gift by the original beneficiary.

By preparing a Deed of Variation the original recipient is able to give assets to another recipient, and by making the appropriate election, avoid the need to survive such gift by seven years. Such arrangements are the most common use of Deeds of Variation.

There are, other reasons and uses for Deeds of Variation, and three particular planning strategies when they might be used:

1.  Traditionally, when preparing a Deed of Variation there is an election that the gift shall be treated, for Inheritance Tax purposes and Capital Gains Tax (CGT) purposes as though the gift is treated as being made by the deceased from the date of death. However, it is possible to make a gift and elect only for Capital Gains Tax purposes to take effect.

Accordingly, the “seven-year clock” will still be relevant, but the value for CGT purposes of the gift, when calculating the potential gain, will be referenced to the date of death value.

This option might be appropriate because of the desire to try and preserve a full Transferable Nil Rate Band Allowance, and not use up any of the allowance when a husband or wife die first.

2.  In circumstances where two parties own shares in a business, and their shares now pass to the survivor, for example husband and wife, if one party dies, then the survivor may wish to make a gift of shares to the next generation.

However, for Capital Gains Tax purposes, part of the base value will include the survivor’s original base value, and part will be the date of death value. Accordingly, complex calculations can result. It may be preferable for the survivor to be the one making a gift, rather than using part of the Nil Rate Band Allowance.

The first option above may be preferable, or it might be appropriate to redirect the shares into a life interest trust for the benefit of the survivor in order that they can be kept separate from the survivor’s own shareholding.

3.  A popular use for Deed of Variation is also to create a Discretionary Trust in order that the assets can be kept separate to the original beneficiary’s own assets. He, or she, may still be a beneficiary of the trust, in order that the assets are not given away outright, and would still be available, but by not belonging to the original beneficiary, they are no longer part of his or her estate for Inheritance Tax purposes.

As can be seen, there are a number of uses for Deeds of Variation, and in certain circumstances they can be a particularly useful as part of a tax planning strategy.

For further information and to discuss the appropriateness of any Deed of Variation, please contact Richard Horwood for further assistance.

Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances.