Insights
Insights 11.10.21 Author: Michaela Lamb

Use of Deeds of Variation

Insights 11.10.2021 Author: Michaela Lamb

In an ideal world, everyone would take tax advice before drafting their Will to ensure that not only are their loved ones taken care of, but that this is done as tax efficiently as possible, both now and in the future.

Unfortunately, this is not always the case, either because advice was not sought, or the rules have changed since the Will was drafted. Alternatively, there may have been other changes in circumstances that have not been taken into account in the Will. Although the best way to ensure that this does not happen is to make sure your Will is reviewed every few years and, where necessary, updated, all is not lost if that hasn’t happened. It is possible for the beneficiaries of a Will to “vary” their entitlement within two years of the death of the testator, should they wish to, by using a Deed of Variation.

How is a Deed of Variation used?

A Deed of Variation can only be made by a Beneficiary who wishes to give up all or part of their entitlement of an estate. They can choose who to redirect this to, be that another individual or to a Trust. The original beneficiary must be able to make this agreement, and so it cannot easily be used to vary the interest of a minor or someone who does not have capacity.

In either case, agreement of the Courts is required, which can be difficult and expensive to do. Where these kinds of beneficiary are included in a Will, it is important to ensure the terms included in the Will reflect what you want to happen, as it would not be easy to change after you have passed away. When a Deed of Variation is made, only the beneficiary giving up all or part of their entitlement is affected – gifts to other beneficiaries remain unchanged, and redirection to minors or those who lack capacity can be made in this way without the recipient needing to agree.

What are the reasons for using a Deed of Variation?

There are sometimes very practical reasons for using a Deed of Variation – for example a beneficiary may not want (or need) to inherit assets, and so passing them on to other members of the family/a charity etc, may be  something that they want to do for personal reasons.

A Deed of Variation may also make good tax sense. For example, if you leave an asset to a loved one who already has sufficient wealth to utilise the nil rate band and so whose estate will ultimately suffer 40% IHT, they may prefer to skip a generation (or two) and leave this to someone who they expect to outlive them, extending the period between the next time IHT is paid on those assets. If the person still wants to benefit from the assets, but again already has sufficient wealth to utilise their tax-free nil rate band, redirecting the assets into a Discretionary Trust for themselves and their wider family could provide long term tax planning opportunities, as well as being a practical solution. In this case, the individual retains their interest, without the risk of another 40% tax charge later, as well as providing a level of protection over the assets, for example against divorce, bankruptcy or long term care costs. Tax is still payable by Trusts, but under a different regime, which is often more palatable.

How can CBW help?

Because we do not know if HMRC will allow the practice of Deed of Variation to continue indefinitely, the best thing you can do is to make sure your Will is structured correctly during your lifetime, to make sure that your loved ones are all taken care of properly. CBW are pleased to be able to offer a Will Review service, and to make recommendations for any changes required.

If you are the recent beneficiary of a Will and want to discuss your options for varying your entitlement, again, we would be happy to review and make our recommendations based on your circumstances.

In both situations, we work closely with a number of solicitors who can help you to redraft your Will following our recommendations, or to draft a Deed of Variation. If you already have a trusted solicitor, we can work with them and any other IHT matter, to ensure that you and your family are fully protected and tax efficient. Alternatively, we can make recommendations of those in the legal profession who we work closely with and who would be happy to help.