Could You Save Tax with a Deed of Variation?

Could You Save Tax by Making a Deed of Variation?

When administering an estate, circumstances can change. Beneficiaries may find that the distribution of assets no longer reflects the family's wishes, financial needs, or long-term tax planning objectives. In certain situations, a Deed of Variation can offer a practical solution.

A Deed of Variation allows beneficiaries to alter how assets from an estate are distributed after someone has died. This can provide greater flexibility for families while also creating potential tax planning opportunities.

What is a Deed of Variation?

A Deed of Variation, sometimes called a Deed of Family Arrangement, is a legal document that enables beneficiaries to redirect all or part of their inheritance to another individual or into a trust.

This could involve:

• Passing assets to children or grandchildren
• Changing who receives a particular asset
• Redirecting funds into a trust for future generations
• Adjusting an inheritance to better reflect current family circumstances

Importantly, any beneficiary whose entitlement is reduced by the change must agree to the variation.

Can a Deed of Variation Reduce Tax?

In some cases, yes.

Where the necessary conditions are met, HMRC treats the revised distribution as though it was made by the deceased, rather than by the beneficiary who originally inherited the asset. This can create opportunities to improve the estate's tax position.

Potential benefits may include:

• Inheritance Tax (IHT) planning by redirecting assets to beneficiaries who can make better use of available allowances or exemptions.
• Capital Gains Tax (CGT) advantages, as assets are generally treated as passing directly from the deceased.

However, a Deed of Variation should not be used solely as a tax avoidance tool. Any decision should take account of both tax implications and wider family considerations.

Key Rules to Remember

To be effective for tax purposes, a Deed of Variation must:

• Be completed within two years of the date of death
• Be made in writing
• Include the appropriate statements required by HMRC
• Be agreed by all affected beneficiaries

Missing these requirements could mean the intended tax treatment is not available.

How can Charlton Baker help?

While a Deed of Variation can be a valuable inheritance tax planning tool, every estate is different. The potential tax savings must be weighed against legal, financial and family considerations to ensure the right outcome for everyone involved.

At Charlton Baker, our experienced tax advisory team works closely with individuals, families and executors to help navigate estate administration, Inheritance Tax planning and wider wealth preservation strategies. Call them now on 01380 723692 or email here.