A deed of variation is required to amend the distribution of assets in a will after a person has passed away. In essence, a deed of variation is a legal document that modifies the distribution of assets in a person’s will (or the intestacy laws in the absence of a will) after their passing. Only the “beneficiaries”—those who stand to inherit—have the authority to create this document.
A deed of variation differs in each case. A beneficiary may utilise it in some circumstances to determine how part of the estate is distributed. In other instances, though, it can apply to the entire estate.
What Is A Deed Of Variation?
How Does A Deed Of Variation Work?
Once the agreement is signed, the beneficiary has the option to transfer all or part of their interest in the estate. Typically, people transfer their interest in an estate to a trust, charity, or another third party.
A deed of variation typically results in a gift being made from the original beneficiary to a new recipient. Despite its many benefits, if used improperly, there may be unexpected tax repercussions.
The Benefits Of Using A Deed Of Variation
There are multiple reasons why a beneficiary might want to divert part or all of their inheritance. A deed of variation is primarily used for the following reasons:
- To include someone as a beneficiary who may have been excluded. Leaving someone out of the will is a common scenario.
- A beneficiary may donate all or a portion of their inheritance to charity.
- To realise some tax benefits. In certain situations, beneficiaries may discover more tax-efficient ways to divide an estate to pay less capital gains and inheritance tax.
- In matters concerning divorce. For those who may be thinking about divorcing, in that situation, an individual may choose to use a deed of variation to keep their inheritance out of the financial arrangement.
- A better alternative to intestacy. The assets of the decedent’s estate would follow the intestacy laws if they didn’t have a valid will. Only the deceased’s spouse, civil partner, and a select few other relatives are permitted to inherit the estate’s assets under the intestacy rules. So, unmarried partners, stepchildren, close friends, and others will not inherit under these conditions.
What Changes Can Be Made?
The exact conditions can be modified to be as simple or complex as you need them to be, but you are only permitted to change your own share of the inheritance. You may wish to:
- Redirect certain assets to other individuals.
- Give away some or all of your entitlement.
- Set up a trust.
It is not necessary for the recipient of your entitlement to already be mentioned in the will. Deeds of variation are frequently used to alter the distribution of inheritance so that everyone benefits, despite the fact that you can only change your own claim.
As such, each beneficiary may determine for themselves how to distribute their own shares.
What Changes Can’t Be Made?
You are unable to use a deed of variation to:
- Alter someone else’s inheritance without their permission.
- Award yourself a greater share of the estate (unless gifted by another beneficiary).
- Change those named in the will, such as executors and guardians.
You should seek legal advice if you are having difficulty with the executor (the person responsible for managing the estate).
Do I Need To Register A Deed Of Variation?
Contrary to popular belief, a deed of variation does not require formal registration. The document must be signed by the will’s beneficiaries, those whom the revisions may impact, and any additional inheritors.
The will’s executor must then approve the adjustments. The variations then become legally binding.
It’s important to note that the executor or administrator of the will must sign the deed of variation if it raises the amount of inheritance tax that must be paid. HM Revenue & Customs should also receive a copy.
In addition, the following individuals (who must be over 18) need to sign the document for it to be legally binding:
- All beneficiaries.
- Those affected by the changes.
- New inheritors.
The executor, who manages the person’s estate, must then approve the modifications before the deed of variation is deemed final.
Reducing Your Inheritance Tax
When an estate exceeds £325,000 in value, inheritance tax is charged at a rate of 40%. That adds up to a startling amount of money that goes to the state. If the estate is smaller than this, no inheritance tax is owed. Hence, a deed of variation is not required.
Additionally, there is no tax owed if the entire inheritance is left to the surviving spouse, civil partner, charity, or non-profit organisation. If you leave everything to your children or grandchildren, the upper barrier can be raised to £500,000.
Looking at an example of how a deed of variation can reduce inheritance tax, if the deceased left their spouse their entire inheritance, worth £500,000, a total of £70,000 (or 40% of £175,000) would be paid in inheritance tax.
However, you can immediately make amendments to the will that eliminate this payable tax by simply filing a deed of variation.
As previously stated, you will also need to provide a copy of the deed to HMRC if a change increases the amount of inheritance tax due, for instance, if you are now receiving a share of the estate that was originally meant for the deceased’s partner. The executors or administrators of the will must sign the deed of variation, and you must do this within six months.
Reducing Your Capital Gains Tax
Any profit realised on assets valued at £6,000 is subject to capital gains tax. This could include real estate that isn’t your primary residence, certain shares, and other financial assets. You have an annual tax-free allowance of up to £12,300 (subject to change in line with the government’s budget). Your current tax bracket affects how much capital gains tax you will pay.
As with inheritance tax, you can use a deed of variation to reduce or wipe out any associated cost. No capital gains tax is owed on gifts to a spouse, civil partner, or charity. You can retain more of the estate’s assets by executing this deed.
Deed Of Variation And Intestacy
A will is not always required in order to submit a deed of variation. The term “intestate” refers to a death that occurred without a will being made.
In such a case, the inheritance usually goes to the surviving spouse or domestic partner. The offspring of the deceased may potentially inherit, depending on the amount of the estate.
You can alter this through a deed of variation, allowing you to include more family members, friends, and even non-profit organisations.
How Long Does A Deed Of Variation Take?
A deed of variation shouldn’t take longer than a few weeks if there aren’t any complications. However, any changes to this document must be approved by all beneficiaries. As a result, there could occasionally be conflicts regarding the adjustments.
In certain situations, it may take longer since beneficiaries will need to negotiate.
The Cost Of A Deed Of Variation
Writing a deed of variation doesn’t strictly require the assistance of a professional. But, like with everything legal, it’s best to seek legal advice about your requirements. A solicitor will create a formal document on your behalf.
A deed of variation will typically cost around £1,250 to prepare in its most basic form. If there is a need for more discussion or if there are disagreements within the family regarding the estate, legal fees will likely be higher.
Before Or After Probate?
After probate has been granted, organising a deed of variation could cause you some concern. Essentially, probate is the legal procedure that grants the authority necessary to carry out a will’s instructions and to administer a person’s inheritance after their death. It entails requesting a probate grant, paying off any obligations the deceased had, and distributing their assets in accordance with their will.
Once you enter the probate phase, the legal process is coming to a close. Fortunately, there is no restriction on submitting a deed of variation before or after obtaining a grant of probate. As long as it is completed within the two-year window following someone’s passing, it will follow the necessary process.
Can I Revoke A Deed Of Variation?
A deed of variation cannot be revoked after it has been made. Therefore, if you want to create a deed of variation, you must ensure it is accurate to prevent expensive consequences, such as increased inheritance taxes.
Summary
Owing to the nature of the document, a deed of variation needs to adhere to a number of legal standards in order to be regarded as legitimate. It must:
- Be dated no later than two years after the person’s passing.
- Include a statement of intent.
- Be signed by all beneficiaries affected by the variation.
- Set out details of the alterations which are being made.
- Be executed by a beneficiary who is at least 18 years old and of sound mind.
- Be signed by executors, where inheritance tax increases as a result of the variation.
Final Thoughts
That rounds off our look at a deed of variation. An important document in the property world and one that should be taken seriously.
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