After someone dies, the beneficiaries may find that the way an estate has been distributed does not reflect their wishes or the family’s circumstances. A Deed of Variation can allow beneficiaries to change how inherited assets are passed on and, in some cases, can help reduce the amount of tax payable. It is important to note that any beneficiaries who would receive less as a result of the changes must agree to the alteration.
A Deed of Variation (also known as a deed of family arrangement) allows beneficiaries to redirect all or part of their inheritance. This could include passing assets to another family member, changing who receives certain assets, or placing assets into a trust.
For tax purposes, where the required conditions are met, HMRC treats the variation as if it had been made by the person who died. This means the redirected assets are generally treated as passing directly from the deceased rather than from the original beneficiary. This can be useful for Inheritance Tax planning and may also have Capital Gains Tax benefits.
To be effective for tax purposes, the variation must normally be made within two years of the date of death. It must be in writing and contain the required statements confirming that the relevant tax rules are to apply. All beneficiaries whose interests are affected must agree to the changes.
A Deed of Variation cannot be used simply to avoid tax after an inheritance has already been received. Before making any changes, beneficiaries should consider the wider tax and family implications.