Deed of Variation

Deed of Variation and the three main ways that they can be used to protect assets and reduce Inheritance Tax
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    A Deed of Variation is a legal instrument (a legal document) that changes the destination of either all the assets or some of the assets in someone’s will.

    A Deed of Variation can only be used after someone has died and within two years of their death. It can only be used if all the beneficiaries effected by the proposed change agree to it.

    If everything in someone’s will is left to one person and that person doesn’t want or need the inheritance they can sign a Deed of Variation within 2 years of the death saying that their inheritance should go elsewhere such as to a sibling, their children or their grandchildren.

    If the deceased left their estate equally between 2 sons and one of those sons doesn’t want or need the money then that son can use a Deed of Variation to change the direction of their own inheritance only. The other son’s 50% remains the same and goes directly to him.

    Family Wills
    A deed of Variation can divert assets to your children

    There are 3 main types of Deed of Variation and they’re best described in an example as below;

    A widow has 3 sons, Tom, Dick & Harry, she loved them all and wanted her entire estate equally between the three of them. When her husband died, he left her everything and now her estate is worth £900,000 so her sons should inherit £300,000 each.

    However, the three sons have had different fortunes in life and their needs and situations are not the same, here’s how they each can use a Deed of Variation to satisfy their individual needs:

    Type 1 – Tom’s story

    Tom is retired and lives a comfortable life and has a good pension, he owns his own house and wants for nothing so he doesn’t need the £300,000 that he’s going to receive from his mother’s estate.

    Tom signs a Deed of Variation saying that his share shouldn’t go to him but be split equally between his own 2 children who are just starting out on the property ladder and £150,000 each would help them a great deal. He and his family are more than happy with this. This is Deed of Variation Type 1.

    Type 2 – Dick’s story

    Dick is already fairly wealthy and already falls into the Inheritance Tax bracket so receiving a £300,000 gift from his mother would simply be taxed at 40% when he dies so his children would lose £120,000 when Dick dies. However, he’d like to have the money to play with as he wants to buy a property to let out but he doesn’t want the capital inside his estate.

    To prevent the generational IHT and to allow his to have the buy to let property he signs a Deed of Variation saying that his share of his mother’s estate should go into a Discretionary Trust for him and his children and their descendants. This way his mother’s £300,000 is still available for him to use, he can still receive the rental income from the buy to let but the value of the buy to let isn’t inside his estate so wont be included in his IHT calculations when he dies as it’s in a Discretionary Trust. This is Deed of Variation Type 2.

    Type 3 – Harry’s story

    Harry is very wealthy and he neither wants the capital inside his estate nor any income from it and he’s happy for it to go directly to his children but he’s concerned that his children’s inheritance in both protected and he wants to do some estate planning that will help him reduce the IHT that his estate pays when he eventually dies.

    To do this Harry signs a Deed of Variation the same as Dick’s, he places his inheritance in a Discretionary Trust benefiting himself and his children and their descendants (T1). However, he doesn’t re-invest the capital, he takes the £300,000 out of the Discretionary Trust using a Loan Note and uses the cash to set up a new trust just for his children and their descendants (T2).

    This has the effect of saving his own estate’s IHT liability the sum of £120,000 as the £300,000 was placed in trust (T1) so not inside his estate but also, then his estate has to pay back the debt to T1 of £300,000 so reducing his estate by that amount and further reducing his IHT bill by another £120,000 providing he survives the setting up of his children’s trust (T2) by 7 years. The total IHT saving for this exercise would then be £240,000. This is Deed of Variation Type 3.

    As you can see, a Deed of Variation can be a very useful tool.

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    Matt Walkden Will Writer

    About Matt Walkden

    I am a Professional Will Writer and I offer a small number of other products that complement my Will Writing such as Lasting Power of Attorneys (LPA’s), Fixed Price Estate Administration, often called Probate and some Property Products such as changing a family home from Joint owners to Tenants in Common.

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