Uses Deed of Variation

When a loved one passes away, their will may not always reflect the best financial or personal circumstances of those left behind.

A Deed of Variation can be used to adjust the distribution of an estate, ensuring fairness, reducing tax burdens, and better meeting the needs of beneficiaries.

It can be a very valuable tool for beneficiaries, but like all legal decisions, it requires careful consideration. To decide if it’s the right solution for you, please read on. For personalised advice on your situation, please contact MW Legal Services for expert legal advice.

What is a Deed of Variation (DoV)?

When someone writes and signs their will (the ‘testator’), they naturally hope they are doing the right thing for their family as to who gets what and how much tax they will pay.

However, if a will is made many years before the testator’s death, the personal circumstances of the people who inherit the estate (the ‘beneficiaries’) could change. Legislation can also change, meaning there might be bigger tax implications, potentially leading to more inheritance tax than originally expected.

A Deed of Variation is a legal document that can be used by the beneficiaries of a will to change the allocation of the deceased person’s estate. It can only be used within two years of the will writer’s death and only if all the beneficiaries affected by the proposed change are in agreement.

How does a Deed of Variation work?

A Deed of Variation is drawn up by a solicitor who specialises in estate planning and probate law. They will ensure all beneficiaries agree to the changes, draft the document correctly to meet legal standards, advise on tax implications and potential savings and submit the necessary paperwork to HMRC if required.

Once the document is signed, it becomes legally binding, and the executors can make the changes and redistribute the estate according to the new terms.

Why use a Deed of Variation?

A Deed of Variation allows beneficiaries to make changes to a valid will after a person has passed away. This flexible tool helps ensure that the estate is distributed in the most fair and tax-efficient way. It also ensures that inheritance is handled in a way that best suits your needs and those of your family.

You can use a Deed of Variation to:

1. Reduce tax liability – If a will results in higher-than-expected inheritance tax (IHT) or capital gains tax liability, a Deed of Variation can help adjust the distribution to reduce the overall tax burden.
2. Redirect an inheritance – If you have been left money that you don’t need, you can use a Deed of Variation to pass it on to someone who would benefit from it more.
3. Manage your own estate – If you already have an inheritance tax liability and receiving additional assets would increase it, a Deed of Variation allows you to redirect the funds to your children, for example, or place them in a trust to protect them for the future.
4. When someone dies without a will – In this case, the will is distributed according to intestacy rules, which may not align with what the family wants. A Deed of Variation (DoV) allows beneficiaries who inherit under intestacy laws to rearrange the distribution of the estate, ensuring it better reflects the deceased’s wishes or the family’s needs.

Benefits and drawbacks of a Deed of Variation

Now that we understand why you would use a DoV, let’s take a look at the advantages and disadvantages.

Benefits of the DoV process

A DoV has many advantages. It allows the beneficiaries of a will to distribute the deceased’s assets in a more tax-efficient way, saving money for both the current and future beneficiaries. It also allows them to direct assets in a way that reflects the family’s situation and wishes more fairly.

Drawbacks of the DoV process

As with all legal processes, a DoV has constraints. It requires unanimous agreement by all affected beneficiaries, which can be difficult in complex family situations. It must also be completed within two years of the testator’s death, and many leave it until it’s too late. There is also a cost involved, but the benefits usually make it worth it.

Types of Deed of Variation and common scenarios

There are three main types of Deed of Variation (DoV), which are best understood through examples.

A widow passes away, leaving behind an estate worth £900,000 to be split equally between her three sons: Tom, Dick, and Harry. Each son is set to inherit £300,000, but their financial situations and priorities differ.

Here’s how they might use a DoV to adjust their inheritance:

1. Giving up entitlements

Tom is retired, financially secure, and does not need the £300,000 from his mother’s estate. However, his two children are struggling to buy their first homes.

Tom signs a Deed of Variation to redirect his share of the inheritance to his two children, giving them £150,000 each. This ensures the money goes where it’s needed most without passing through Tom’s estate.

2. Using a trust to reduce inheritance tax

Dick, so receiving a £300,000 gift from his mother would simply be taxed at 40% when he dies, is already wealthy, and his estate exceeds the inheritance tax (IHT) threshold. If he inherits £300,000, it will become part of his taxable estate, meaning £120,000 (40%) would be lost to IHT when he passes away. However, he wants to use the money to buy a rental property while keeping it outside his estate.

Dick signs a Deed of Variation to place his £300,000 inheritance into a discretionary trust for himself, his children, and their descendants.

• The trust allows Dick to use the funds (e.g., to buy a rental property).
• He can receive rental income from the property, but the capital remains outside his estate.
• This means the £300,000 will not be taxed as part of his estate when he dies, saving £120,000 in IHT for his heirs.

3. Creating a trust

Harry is also wealthy and does not need the £300,000. He wants to pass it directly to his children while ensuring maximum IHT savings and protecting the inheritance from future tax liability.

Harry signs a Deed of Variation similar to Dick’s, placing his inheritance into a discretionary trust (Trust 1) for himself and his descendants. However, he takes an extra step:

• He withdraws the £300,000 from Trust 1 using a loan note and places it into a new trust (Trust 2) for his children and their descendants.
• This creates an additional IHT saving of £120,000 since his estate now has a debt of £300,000 owed to Trust 1, reducing its taxable value.
• If Harry survives for seven years after setting up Trust 2, this debt is fully excluded from his estate, doubling the IHT savings to £240,000.

How MW Legal Services can help you

If you are in a situation that could benefit from a Deed of Variation, it’s best to get expert legal advice before proceeding. The friendly experts at MW Legal Services can discuss your current situation and advise on the best course of action. Get in touch today.

Frequently asked questions about Deed of Variation