Deeds of Variation: A second chance to shape an inheritance

Inheritance Tax has been receiving increased attention in recent years. With tax-free thresholds remaining frozen and Inheritance Tax receipts continuing to rise, more families are finding themselves considering the most effective way to pass wealth between generations. 

Against this backdrop, many people are surprised to learn that, even after someone has passed away, there may still be an opportunity to adjust how assets pass through an estate.

This is where a Deed of Variation can be a valuable tool.

What is a Deed of Variation?

A Deed of Variation is a legal document that allows a beneficiary to change what happens to all or part of their inheritance after a person's death.

Rather than accepting an inheritance outright, a beneficiary may choose to redirect it to another person, a trust or a charity. This can be done for a variety of reasons, including family circumstances, succession planning or tax efficiency.

Why might someone consider one?

Every individual and family is different, but common reasons for using a Deed of Variation include:

• Passing assets directly to children or grandchildren
• Providing for a family member with greater financial need
• Supporting a charitable cause
• Simplifying future estate planning
• Reviewing the Inheritance Tax position of the family as a whole

For example, an adult child who inherits from a parent may feel that they do not currently need the funds themselves and would prefer some of the inheritance to pass directly to their own children. A Deed of Variation can often achieve this more efficiently than receiving the inheritance first and then making gifts later.

A useful source of flexibility

When a Will was written many years before death, family circumstances may have changed significantly. Children may have become financially secure, grandchildren may have been born or tax considerations may look very different from those originally anticipated.

A Deed of Variation provides beneficiaries with a degree of flexibility to ensure an inheritance better reflects current circumstances and family priorities.

Timing is important

If a Deed of Variation is intended to benefit from certain Inheritance Tax or Capital Gains Tax provisions, it will need to be completed within two years of the date of death. 

Although that may sound like a long time, the administration of an estate can move quickly, so it is sensible to obtain advice as early as possible if a variation is being considered.

Final thoughts

As Inheritance Tax remains a key consideration for many families, it is worth remembering that estate planning does not always end when someone passes away. In the right circumstances, a Deed of Variation can provide a valuable opportunity to revisit how assets pass and help achieve the outcomes that work best for the family involved.