What advantages of a Deed of Variation offer?
A Deed of Variation is a legal document that enables beneficiaries specified in a Will to change how an estate is distributed.
It is important that it enables existing beneficiaries to include new beneficiaries in an estate. They can also change how an estate is divided up between them thanks to this. The following situations provide excellent instances of when a Deed of Variation may be required, however, people may want to do these things for various reasons.
- Despite having four children, a mother only distributes her fortune to three of her offspring in her will. The three beneficiaries consider the sister who received nothing to be equally deserving of a share of the estate. To make the sibling an equal beneficiary, they agree to use a Deed of Variation.
- When a man passes away, he leaves two children with an equal share of his estate according to his will. He was taken care of by a close friend in the final year of his life. The friend should receive some funding from the deceased man’s estate, the two kids agree. They transfer £20,000 to the friend using a Deed of Variation.
- A woman passes away and leaves her three children an equal share of her wealth. The first two kids are wealthier than the third. They settle on splitting up the remaining estate after giving the less fortunate sibling half of it.
As you can see, a Deed of Variation’s main benefit is that it allows current beneficiaries to change how an inheritance is allocated. A smaller tax bill, however, is yet another significant advantage of a Deed of Variation.
Deeds of Variation and Inheritance Tax
In some cases, a Deed of Variation can be a useful tool for lowering the amount of Inheritance Tax (IHT) due on an estate. IHT is typically charged at a rate of 40% on estates that exceed £325,000. Therefore, the amount of IHT would drop to 36% if the beneficiaries agreed to donate 10% of the inheritance to charity.
In a manner similar to this, adding a new beneficiary enables you to transfer all or part of an inheritance to another person, such as an adult child. This may lower the amount of IHT that must be paid on this portion of an estate.
This is another approach to giving money as a gift that is tax-efficient. Consider the scenario where you get £30,000 from an inheritance and wish to gift your 25-year-old daughter the entire sum. If you withdrew the funds out of the estate and gave them to your daughter, you would need to live for seven years before they no longer counted towards IHT. The “seven-year rule” no longer applies, and the money is no longer potentially liable to IHT if you create a Deed of Variation that names your daughter as the new beneficiary of the original estate.
The use of a Deed of Variation may also have other tax benefits, such as a potential reduction in Capital Gains Tax. However, due to the complexity of these arrangements, we firmly advise speaking with a member of our specialised Wills, Trusts, and Probate team at SGT Law Firm for advice that is personalised for your situation.
When am I permitted to use a Deed of Variation?
A Deed of Variation may be executed either before or after a grant of probate. However, if you’re making it for IHT or CGT purposes, you must do so within two years of the deceased person’s passing. Any Deed of Variation must also meet the following requirements in order for HMRC to consider it valid:
- The written word
- All beneficiaries who might suffer a loss as a result of the change(s) are required to sign the deed.
- Specify exactly which aspects of the estate are changing, as well as who will benefit from them.
Additional requirements include:
- The beneficiaries must be at least 18 years old.
- The changes must be accepted by every beneficiary.
- No existing beneficiary may receive compensation for changing their share.
- No variations shall be based upon payments from persons other than the Estate.
Additionally, it’s crucial to remember that you require court approval if a Deed of Variation will have an impact on children (or unborn children). Finally, it is possible to utilise a Deed of Variation if you are a beneficiary under intestacy rules (i.e., the deceased didn’t leave a Will). We can assist you in understanding the rules and constraints that apply in this situation.
Is a Deed of Variation needed?
The answer to this question is very dependent on your personal situation, your goals, and the goals of any other beneficiaries of a will. Even while a Deed of Variation can increase your control over how an estate is divided and can offer you considerable tax advantages, it’s important to get legal advice.
Please get in touch with us at SGT Law Firm right away if you’d like assistance on this or any other issue pertaining to Wills, Probate, and Estate Planning.