After someone dies, it is possible for the beneficiaries of their estate to make changes to the distribution of the estate instead of following the terms of their Will or Rules of Intestacy (if there is no Will). This can be done using a Deed of Variation.
Beneficiaries can alter or redirect their inheritance entitlement. They can choose to redirect their share to anyone they wish, regardless of whether they are named in the Will or recognised under the Rules of Intestacy. You can make these changes before or after the Grant of Probate / Letters of Administration is granted but for tax reasons, any changes must be made within two years of the person’s death.
Deed of Variation: A way to redirect estate and reduce Inheritance Tax for beneficiaries
A Deed of Variation is a useful way of redirecting a share of the estate so that it effectively bypasses a beneficiary’s estate and is not included in that beneficiary’s estate for Inheritance Tax (IHT) purposes. It is particularly important if a beneficiary intends to gift an asset or sum of money to someone else in the near future. If you die within 7 years of making a gift, its value may be added back into your estate for the purpose of calculating IHT due upon your death. This gift is known as a Potentially Exempt Transfer (PET). Rather than make a PET it would be advisable to prepare a Deed of Variation so that any gift comes from the Deceased’s estate and not ‘your pocket’ so that the 7-year rule does not apply.
A Deed of Variation can also be used to include a charity as a beneficiary to reduce the amount of IHT that needs to be paid by the estate. A gift to a charity is 100% exempt from IHT.
Importance of Regularly Reviewing your Will and Estate Planning
Many couples prepare simple UK leaving everything to each other. It is important to keep your Wills under review as circumstances, both financial and personal may change. Estate planning is a process which is constantly shifting in line with these circumstances. If a couple has simple Wills but discovers on the first death it would make more sense to give some of their joint estate to their children (rather than to the surviving spouse / civil partner) they could use a Deed of Variation to amend the first to die’s Will, so that any monies / assets passed to the children from their estate and not as a gift from the surviving spouse / civil partner, avoiding the 7-year rule for a PET.
Likewise, if you inherit any monies / assets from someone else you could use a Deed of Variation to vary their Will (or entitlement under the Intestacy Rules) so that your inheritance goes straight to your children (or anyone else) and bypasses your estate.
It is important to consider variations within 2 years to secure the best IHT structure. Relying on variations is not normally the best option, but often where updated planning was not entered into prior to death, it is the only way to secure reliefs after the first spouse / civil partner dies.