About this series of articles
This article is one in a series that combines explanations of legislation with practical considerations when you write your will.
What is a deed of variation of a will?
A deed of variation changes the terms set out by the testator in his will. Whatever its date, the variation takes effect from the date of death.
Most rearrangements are made within a family because the beneficiaries have common family interests. It has therefore become more widely known as a deed of family arrangement. But the deed need not be among a family. It can be as simple as a beneficiary giving up his gift in favour of his wife or child.
It could be argued that, as a will maker, you have no direct concern about the details of how to make a deed of variation or family arrangement. However, we think best to provide a full picture so as to help you to decide whether you should have such possibilities in mind.
The very fact that a deed of family arrangement is possible rather goes against the proposition that you want to use your will to say what will happen to your estate. However, you must assume that the device will be used only when your affected beneficiaries believe it is in their best interests, and that is what you are trying to achieve in your will, after all.
The requirements of a deed of variation
Because a variation may affect legal entitlements and obligations to pay tax, there are certain legal requirements for it to be valid. These are:
- It may be made by several beneficiaries or a single beneficiary.
- It must be made within two years of the date of death. That is a firm rule, but a variation made on the second anniversary of the death will qualify.
- The deed must be made by every person whose beneficial interest under the will is affected. (Consequently those unaffected need not be parties).
- The variation must be in writing and signed by all the beneficiaries who would lose out because of it.
- If the variation is to take effect for Inheritance Tax, Capital Gains Tax or both, it must include a statement that it is intended to take effect for tax purposes. The beneficiaries can choose whether the variation takes effect for Inheritance Tax only, for Capital Gains Tax only or for both taxes.
- If the variation means that more inheritance tax is due, the executors or administrators must also agree to the variation and must sign it.
- The variation must clearly state the inheritances that are changing and how they are being altered. In other words, for the parts of the estate being varied, your variation should set out: how the estate originally passed under the will or by intestacy; and who is now to receive the benefit from the inheritance as a result of the variation.
- The variation must contain a stamp duty certificate if it changes the beneficiary of any shares or marketable securities.
- You may not make a variation of a whole estate. The subject matter must be specific, identifiable assets. But it in order to specify assets which have been left to the executor in trust for some person, even if as yet unborn.
- It is effective to split a legacy, for example by varying a single bequest so that you keep part and pass on other parts to different beneficiaries.
- Any beneficiary may vary his entitlement under the will or intestacy. Accordingly, several variations may be effected in respect of the same estate, and at different times before the expiry of the two year period.
- If the variation affects the interests of children (or even of children not yet born) you should speak to a solicitor, as you may need the approval of a Court. A parent's signature on behalf of a child is not sufficient.
- You can also make a variation of an estate in administration, that is, where the deceased made no will. Those who have statutory entitlement may by deed arrange for their entitlement o be received by some other person.
When your beneficiaries might want to vary your will
There are a number of reasons why your beneficiaries might want to use a deed of variation:
- to avoid increasing the size of your own estate and instead skip a generation and leave the money to your child or grandchild.
- specifically to benefit someone who needs the money more than you do.
- to add your gift to a discretionary trust set up by the deceased.
- to defer and maybe avoid inheritance tax (unofficially). If your children decide to transfer their inheritance to your wife (their mother), she might make gifts to them of sums of the same order of size. If that is a contractual arrangement, the whole transaction is void. But if it is co-incidental that she gives her money to her children, that is not taxable in her lifetime. If she lives for seven years it is not taxable on her death either.
- to favour one beneficiary or disfavour another, for example if one has suffered an injury which prevents work or another has won the lottery.
- to transfer family business interests from a beneficiary who will not qualify for entrepreneurial relief on ultimate sale to one who will, thereby saving the difference in the rates of CGT charged.
- in England, stamp duty land tax (SDLT) is not payable on a transfer arising from a deed of variation or family arrangement, provided an appropriate certificate is given in the deed.
But there can be problems of:
- unintentionally transferring value from an exempt beneficiary - husband or wife or civil partner, to a beneficiary who will pay inheritance tax at the full rate.
- multiple variations affecting the same asset. The destination of the same assets or entitlement passing under a will or by intestacy cannot be varied more than once. HMRC will not treat any variation that does so as if the deceased had made it.
What happens after a deed of variation has been signed
If the variation does not change the amount of inheritance tax due, there is no need to send it to HMRC. Conversely, if it does, the beneficiaries making the variation should send a copy of the variation to the inheritance tax office dealing with the estate.
If the variation results in more inheritance tax becoming due, then the deed must be sent to HMRC within six months of its date. Penalties for late submission apply.
Where more than one beneficiary has signed the variation, it does not matter who send it to HMRC.
It is sensible to make multiple copies of the deed of variation, so that each person involved has at least one copy. It will be required for tax and other purposes, maybe some years later. For example:
for inheritance tax, suppose a beneficiary who made a variation dies within seven years. HMRC may ask about any gifts that person made. The deed itself is evidence that the gift he passed on by the deed of variation should not be treated as part of his estate at all.
Further information
Next, you might want to read about keeping an inheritance in the family or providing for your children in your will.
We believe that every adult should make a will. So as to encourage you to do so, we provide some of our more straightforward wills (likely to be suitable for most people) absolutely free with no catches or conditions.
Visit our library and choose the most suitable from the list of last will and testament templates. We offer nine in total that together cover thousands of possible variations of wishes. There will be one to suit your situation. If you are in doubt as to which to choose, this article will help you to decide exactly which suits you best.