The current government has invested heavily in tackling both tax evasion and tax avoidance through a number of measures including the introduction of the UK Swiss Agreement, the General Anti-Abuse Rule and the Accelerated Payment regime.

Notwithstanding that, it may have come as a surprise still that George Osborne has ordered a review into the use of Deeds of Variation to counter inheritance tax (IHT) avoidance.

A Deed of Variation is a useful instrument which allows the alteration of inheritances under a Will or the appropriate intestacy rules where there is no Will.

To be effective for IHT purposes, a Deed of Variation must follow the requirements in s142 IHTA 1984. These include:

  • It must be in writing;
  • It must be signed within two years following a person’s death;
  • All beneficiaries affected by the Variation must be party to it and where it increases the amount of IHT the executors must also be included;
  • It must not be made for any consideration in money or money’s worth.

Provided the Deed of Variation contains a statement made by all of the relevant persons to the effect that s142 should apply, the provisions contained in the Deed of Variation will be treated (for IHT purposes) as being made by the deceased. An equivalent statement that s62(6) TCGA 1992 should apply may be considered and contained in the Deed of Variation. If included then, for capital gains tax purposes (CGT), the Variation is to be treated as being effected by the deceased, maintaining date of death as the gifting timing and value for CGT purposes.

Popular belief is that a Deed of Variation is used primarily to mitigate IHT, e.g. to maximise agricultural and business property relief, but it is often used for personal or family reasons. Some examples when a Deed of Variation may be appropriate are the following:

  • Where beneficiaries under a Will are already wealthy, a Deed of Variation allows them to pass on their entitlement to their children or further issue (generation skipping).
  • To take advantage of the IHT reduced rate of 36% where at least 10% of the deceased’s net estate is left to charity.  The reduced rate only applies to deaths after 6 April 2012 and in most cases Wills made before this date will not have been amended prior to death to include any such charitable legacy.
  • To correct or clarify a testator’s directions, e.g. where it is established the deceased had made a mistake in the description of a beneficiary or a provision for a beneficiary.
  • To make better use of the transferable nil rate band – when say the deceased’s nil rate band has been used for a non exempt beneficiary and an exempt beneficiary is available, many Wills were constructed that way pre 9 October 2007 when the transferable nil rate band was introduced.
  • To maximise the use of Business Property Relief and Agricultural Property Relief particularly with other non IHT exempt property but with an IHT exempt beneficiary.
  • To enable a best outcome for a joint estate, spouses or civil partners, where both deaths occur within a short time frame and where the full benefit of two nil rate bands might otherwise be lost – useful in common 30 days survivorship cases.
  • To best cater for post death events such as an increase in property values.
  • To rectify unfairness through lack of knowledge or misconceptions.  It is estimated that approximately two-thirds of adults in the UK do not have a Will and many will not know or will have a flawed understanding of the distribution on an intestacy.  A Deed of Variation can redistribute the estate in a fairer way for the family.

Will drafters do so reflecting clients’ wishes and keeping mindful of the current taxation and succession considerations.

Once completed clients commonly do not revisit their testamentary provisions for some time – often many years – and in the meantime those taxation or succession considerations may have undergone considerable change.  In that circumstance, the availability of the Deed of Variation has proved extremely useful to rescue what would otherwise have been a less desirable outcome. If Deeds of Variation are removed from the lawyer’s tool box significant increased emphasis will have to be put on the need to very regularly conduct Wills’ reviews as a historical safety net will no longer be there.