There are rare opportunities in life to effectively turn back the clock and recreate history. One of these rarities exists in the ability of the beneficiaries of a deceased to effectively rewrite the will of the testator, or if he or she died intestate to write what was previously unwritten.
By completing a Deed of Variation or a Deed of Family Arrangement, the beneficiaries can alter or deviate the distribution of assets from the estate of the deceased amongst the beneficiaries, and can even include beneficiaries not in the contemplation of the deceased when the will was written.
The primary rationale is to take advantage of inheritance tax and capital gains tax savings, so that the ultimate redistribution of the estate is tax effective. It may be that allocation of assets between different beneficiaries having different tax profiles results in an overall saving of tax, or so that inheritance tax and capital gains tax reliefs are fully utilised. Other reasons may be to make the allocation of assets fairer, or perhaps to allow the assets to skip a generation by passing to grandchildren rather than children. The gifts are treated as having been made by the deceased and not the beneficiaries, avoiding potentially exempt transfers (PETS), which require the donor to survive for 7 years before the gift falls out of charge to tax.
A Deed of Variation must be concluded within 2 years of the date of death of the deceased.
A Deed of Variation can only be used if:
- All the beneficiaries who may be adversely affected by it agree in writing
- There is no reciprocal consideration or compensation passing between the parties
- None of the assets are subject to trusts or “gift with reservation of benefit” (assets which are gifted away, but still used by the donor – for example a house which is gifted, but still occupied by the person making the gift)
- If the rights of minor children or those still unborn, the approval of the Court is necessary.
For jointly owned properties, in order to effect the redistribution, there should be a severance of the joint tenancy. While for the purposes of inheritance tax and capital gains tax the joint tenants are treated as if they had severed the joint tenancy in equity, in terms of property law and for the purposes of the Land Registry, a retrospective severance by a deceased joint owner is not possible.
Although a useful lifeline to rescue the position where things could have been arranged better, a Deed of Variation should not be relied upon as part of an individuals estate planning. There is no substitute for proper advance planning while the planner is alive and well.
If you have any questions on what was discussed in this article or require any further information please contact James Wolfson by email firstname.lastname@example.org.