Deeds of Variation
If you are a beneficiary of an estate you have a period of two years to vary your entitlement without any Inheritance Tax or Capital Gains Tax implications.
There are two major reasons why you would want to prepare a Deed of Variation. The first, and most common reason, is a case where a parent wants to give some or all their share to his or her children for tax reasons. Let us take Angela who has a child Max. She has received a legacy of £100k from a rich aunt who has died. She would like to give £50k to Max but ordinarily a gift of this amount would be treated as a Potentially Exempt Transfer (PET) for Inheritance Tax. She would need to survive seven years otherwise the gift would come back into her estate.
Instead she prepares a Deed of Variation whereby half her gift from the aunt passes to Max. As long as this is signed within two years of the aunt’s death this will be treated as a gift from the will and therefore Angela will not be subject to the seven year rule.
Another less well known reason for deeds of variation is to protect assets from the cost of long-term care. Please see my article on long term care. Let us take Jack and Jill who are married with two children. They have made simple wills leaving all their respective estates to each other. Jack dies first and Jill then needs to go into a care home. All of the family’s assets down to £14,250 will be lost on care costs. Had they made care planned wills with a trust we could have protected a significant amount of capital from the clutches of the Local Authority.
A deed of variation by Jill made within two years of Jack’s death establishing the trust will mean that she could still have this protection. However this will be treated as a gift into trust for the purposes of the care rules. Therefore Jill needs to be physically and mentally fit when the deed is signed for it to work. Otherwise it will be seen as deliberate deprivation. The Will route is definitely the better option if possible.
