Deeds of variation

This article explains how deeds of variation can be used to alter the position of a deceased person’s estate and how to register a deed of variation with HM Revenue & Customs (HMRC) in the UK.

What is a deed of variation and when would it be used?

A deed of variation is a legal document which can be utilised where a person has received an asset via a Will or the intestacy rules, but the person would like to vary how they benefit or redirect who benefits from the asset. Providing the formalities of the deed are fulfilled then any entitlements given up will, in effect, be treated as having taken place on the donor’s death, i.e., effectively rewriting the Will.

There are a number of reasons why a deed of variation may be used to redirect assets as described above, but primarily it is for tax planning opportunities. Some examples of this are discussed later in this article.

Who can execute a deed of variation?

Anyone who receives an asset via a Will or intestacy can execute a deed of variation providing they have mental capacity and are considered legally capable (e.g., they are over age 18). All parties who hold a beneficial interest in the asset that is to be redirected must be party to the agreement.

Formalities of a deed of variation

For a deed of variation to be effective for IHT and capital gains tax (CGT) purposes the following formalities need to be fulfilled:

• The document must be in writing and executed as a deed.
• The deed of variation must be executed within two years of death.
• The deed should refer to the part of the Will or intestacy being varied and be signed by all those who would or might have benefited from the original provisions.
• The deed should clearly state which inheritances are affected and how they are changing. This may be best achieved by setting out the original position and then the revision.
• The deed should not be for consideration of money or money’s worth (i.e., in lieu of money or an asset which represents money).
• The deed should contain a statement that ‘the variation is to have effect for either CGT only, IHT only or IHT and CGT as if the deceased had made it’. An example of the wording provided by HMRC is ‘the parties to this variation intend that the provisions of section 142 (1) Inheritance Tax Act 1984 and section 62(6) Taxation of Chargeable Gains Act 1992 shall apply’.
• The deed should contain an exemption certificate for variations of stocks, shares or marketable securities. For example, ‘I/We certify that this instrument falls within category M in the schedule to the Stamp Duty (Exempt Instruments) regulations 1987.’

What if the property being varied has been changed?

If the asset that is subject to the deed of variation has changed, it is still possible to execute a deed of variation.

Is it possible to create a trust within the deed of variation?

Yes. Generally, such a trust would be a discretionary trust. Any variation into a trust made by a valid deed of variation for IHT purposes will have effect for IHT. Any person who executes such a variation will automatically become the trust settlor for income tax and CGT purposes but not IHT purposes.

A draft deed for a discretionary trust is available from Quilter for consideration by a legal adviser.

When a deed is executed, do HMRC need to be informed?

Since 1 August 2002 it is only necessary to inform HMRC of a deed of variation if the tax position is changed by the variation.

A copy of the deed of variation along with a completed checklist, known as ‘IOV2 Instrument of variation’ should be sent to HMRC. HMRC also ask that their reference number or the full name of the deceased and the date of death is quoted in correspondence. The checklist is available from the HMRC website.

When would deeds of variation be used?

Case Study 1 - An existing IHT problem

Alice, 65, is the sole beneficiary of her late mother’s Will and has just inherited £250,000. Alice and her civil partner already have a combined estate of £1.2 million which exceeds their nil rate band and residence nil rate band. Alice is concerned about inheritance tax and is considering giving the inheritance away to her daughter to help her by a house.

Alice’s adviser suggests using a deed of variation to her mother’s Will to divert the inheritance directly to her daughter.

Alice’s legal adviser drafts the variation and includes the statement that section 142 (1) Inheritance Tax Act 1984 shall apply. As a result, the variation is treated as if Alice’s mother had included the gift in her Will and the £250,000 is outside Alice’s estate without the need for waiting seven years.  This immediately saves Alice’s estate £100,000 (£250,000 x 40%) inheritance tax.

Case Study 2  - Nil-Rate band planning

Debbie’s husband died in 2009 leaving his whole estate to her.  Transfers between spouses are exempt for inheritance tax and as a result, she receives 100% of his unused nil rate band (NRB), as well as the residence nil rate Band (RNRB) which was first introduced in 2017.

Debbie married George but then she dies a few years later in 2023, leaving her entire estate to him. George’s estate is now valued at £2 Million which exceeds his nil rate bands. Whilst he does inherit Debbie’s unused NRB and RNRB he can only utilise one NRB and one RNRB in addition to his own. This means the NRB and RNRB from Debbie’s first husband will go to waste.

George’s adviser suggests a Deed of Variation could help maximise use of all NRB and RNRB.

• By diverting £325,000 to a discretionary trust George will be using the wasted NRB. George can define the trustees and beneficiaries of the trust.
• George can also divert a share of the main residence he shared with Debbie, up to £175,000, to her direct descendants.

Assuming the necessary formalities are included, the amount varied is immediately outside George’s estate saving in 40% inheritance tax. George can also be included as a beneficiary of the discretionary trust without triggering a gift with reservation – providing him with potential access to the trust fund if needed. The exercise did not trigger any additional inheritance tax on Debbie’s estate as it is made within her available nil rate bands. George estate will still be able to access the remaining unused NRB and RNRB from Debbie on his death.

Additional points to consider

Double death variations

It is possible to vary assets in an estate once; however, if a husband and wife die within two years of each other, it is possible to effect a deed of variation in respect of both Wills.

Both the husband and wife’s executors along with the beneficiaries of the Will must be party to the deed for IHT purposes.

Pre-owned assets and Gifts with reservation

Pre-owned assets tax (POAT) and gift with reservation of benefit rules do not apply to deeds of variation because the settlor for IHT purposes is regarded as the deceased person.