Glossary · UK
What is Deed of Variation (Inheritance Tax)?
A legal document allowing beneficiaries to redirect their inheritance to someone else within two years of death, treated for Inheritance Tax and Capital Gains Tax purposes as if the deceased had left it that way in their will.
Full Definition
A Deed of Variation (sometimes called a deed of family arrangement) allows one or more beneficiaries of an estate to redirect all or part of their inheritance to someone else -- such as their own children, a grandchild, or a charity -- after the death has already occurred, provided the deed is made within two years of the date of death and meets certain formal conditions, including a statement that the parties intend the variation to be read back for Inheritance Tax and, if elected, Capital Gains Tax purposes. Without this special tax treatment, redirecting an inheritance after receiving it would normally itself count as a gift by the original beneficiary, potentially creating a Potentially Exempt Transfer or, in the case of significant lifetime gifts, other tax consequences for the person making the redirection. With a valid deed of variation, HMRC treats the redirected inheritance as though the deceased had left it directly to the new beneficiary in their will (or under the intestacy rules) all along, meaning it does not count as a gift from the original beneficiary for Inheritance Tax purposes, and does not start a new seven-year clock running against the original beneficiary's estate. This makes deeds of variation a common and legitimate estate planning tool -- for example, a beneficiary who does not need their inheritance and wants to pass it to their own children or reduce the taxable value of their own eventual estate can use a deed of variation to skip a generation without the redirection itself being treated as a taxable gift by them. A deed of variation can also, in some circumstances, reduce the overall Inheritance Tax payable on the original estate itself -- for example, if assets are redirected to a surviving spouse or civil partner (who has an unlimited IHT spousal exemption) or to a charity (which can also reduce the IHT rate on the rest of the estate to 36% if at least 10% of the net estate is left to charity) -- provided all the relevant beneficiaries whose entitlement is reduced by the variation agree to it in writing. All beneficiaries affected by a proposed variation must consent, and if the deceased died intestate or the variation affects a beneficiary who is a minor or lacks capacity, court approval may be needed, since minors cannot themselves consent to give up an entitlement.