Deeds of Variation: Redirecting an Inheritance

The deed redirects what a beneficiary has received (or is entitled to receive) under the will or intestacy. Typical uses:

• Generation skipping — adult children redirect to grandchildren, removing the asset from the children's eventual estate and saving a future round of IHT.
• Equalising between siblings — a will leaves more to one child; the others use a deed to redistribute.
• Tax planning — redirecting to a spouse (spouse exemption), to a charity (charity exemption — and the 36% reduced rate where 10% goes to charity), or into a trust.
• Supporting a family member in difficulty — redirecting to a sibling who has fallen on hard times, into a discretionary trust to protect benefits or shield from creditors.
• Correcting a will error — where the will does not reflect the deceased's actual wishes (e.g. an outdated beneficiary) and all the affected parties agree to correct it.

What a deed cannot do: a deed cannot redirect an asset that the original beneficiary has already given away or sold. The deed must be of an entitlement that the beneficiary still holds (whether or not it has been distributed by the personal representatives). And a deed cannot rewrite the gift in a way that benefits the original beneficiary — for example, the original beneficiary cannot reserve a power to claw the gift back. The rules against settlor-interested arrangements still apply.

Section 142 of the Inheritance Tax Act 1984 is the IHT regime. When the conditions are met, the redirected gift is treated as if made by the deceased. The original beneficiary is not treated as making a transfer of value — meaning no 7-year potentially exempt transfer clock starts running, and the original beneficiary does not need to survive 7 years for the gift to be "out" of their estate.

Conditions for the IHT effect under s.142:

• The variation is in writing and signed by all the people whose entitlement is being given up.
• It is made within 2 years of the death.
• It contains an express statement that the parties intend section 142 to apply (a "statement of intention").
• If the variation increases the IHT due, the personal representatives sign too. Personal representatives can refuse only on limited grounds — for example, where the estate has insufficient assets to pay the additional tax.

Section 62(6) of the Taxation of Chargeable Gains Act 1992 is the CGT equivalent. With an equivalent statement of intention, the new beneficiary takes the asset at the deceased's probate value (the "uplifted" base cost) rather than at the original beneficiary's base cost. This is particularly valuable where the asset has risen sharply between death and the variation.

What the rules do not affect: income tax. Any income arising between death and the variation belongs to the original beneficiary and is taxed as theirs. The variation only redirects the capital.

A deed of variation does not need to be deed-format under the Law of Property (Miscellaneous Provisions) Act 1989 unless property law requires it — but is normally drafted as a deed for evidential reasons. Practical steps:

1. Identify all "losers" — every beneficiary whose entitlement is reduced. All of them must be adults with capacity and must sign. If any is a minor or lacks capacity, the deed cannot proceed without court approval (typically under section 1(1)(d) of the Variation of Trusts Act 1958).
2. Identify the personal representatives. They sign if the variation increases the IHT due (e.g. redirecting from a charity to a non-spouse individual).
3. Draft the deed with: identification of the deceased, the will or intestacy provision being varied, the redirection, the statement of intention under s.142 IHTA 1984 (and s.62(6) TCGA 1992 if assets are involved that could trigger CGT), and the signatures.
4. Notify HMRC. If the variation alters the IHT calculation, file Form IOV2 (the IHT variation form) with HMRC within 6 months of the deed. For estates already through probate, HMRC may need to amend the IHT clearance — but the deed itself does not need court approval.
5. Re-execute the distribution. The personal representatives transfer the asset to the new beneficiary per the deed. Any sale, transfer, or transfer of trust assets is documented as flowing from the deceased to the new beneficiary, not via the original beneficiary.

The deed should be drafted by a qualified solicitor — the tax effect is easily lost by a defective deed, and the consequences (a gift treated as from the original beneficiary, with PET implications) can be very costly.

Common errors:

• Missing the 2-year window. Strictly enforced. A deed made on day 731 has no tax effect; the redirection is treated as a fresh gift from the original beneficiary, starting a 7-year PET clock.
• Omitting the statement of intention. Without the express statement that s.142 (or s.62(6)) applies, HMRC treats the variation as a fresh gift. This is the most common failure.
• Failing to obtain the consent of all losers. Including spouses where a survivorship interest is involved, residuary beneficiaries even if their reduction is small, and trustees of any settled property affected.
• Settlor-interest provisions. If the original beneficiary varies into a trust under which they retain a benefit, the IHT effect is lost — the original beneficiary is treated as the settlor.
• Foreign-domicile issues. Where the deceased was non-domiciled or the new beneficiary is, additional issues arise. Seek specialist advice.

A deed of variation is not the only route — the personal representatives can also distribute differently with the consent of all beneficiaries, and the 7-year potentially exempt transfer rules let beneficiaries make onward gifts. But for tax-efficient redirection in the immediate aftermath of death, the deed is usually the cleanest tool.