What is the 2-year rule for a deed of variation?

Full answer

A deed of variation lets a beneficiary of an estate redirect all or part of their inheritance to someone else -- for example skipping a generation to children or grandchildren, or topping up a charitable legacy. The key timing rule is that the variation must be completed within two years of the date of death. Who it affects: anyone who inherits under a will or intestacy and would prefer the money or assets to go elsewhere, and the wider family or charities who benefit. All beneficiaries whose entitlement is reduced must agree and sign. How the mechanism works: if the deed is signed within two years and includes the required statements electing for the tax treatment to apply, then for inheritance tax and capital gains tax the redirected gift is read back as though the deceased had left it that way. This means the original beneficiary is not treated as making a gift themselves, so it does not count as a potentially exempt transfer from them and does not start a fresh seven-year clock on their own estate. Without the variation, the same redirection during life would be the beneficiary's own gift and could be caught by IHT if they died within seven years. Worked example of the effect: a beneficiary inherits GBP 100,000 but redirects it to a charity by deed of variation. With the charity exemption read back into the estate, that GBP 100,000 can reduce the estate's IHT, and if total charitable gifts reach 10% of the net estate the IHT rate on the rest can fall from 40% to 36%. 2026/27 detail: the nil-rate band remains GBP 325,000 and the residence nil-rate band GBP 175,000. The deed does not move the assets in time -- it only changes the tax treatment -- so take legal advice. Use the inheritance tax calculator to model the estate.

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