Strategic Estate Planning: The Role of a Deed of Variation
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only. You should always seek professional advice from an appropriately qualified adviser.
All contents are based on our understanding of current legislation, which is subject to change, any information provided here is only correct at the time of posting.
The Financial Conduct Authority do not regulate will writing, loans, credit cards or some forms of mortgage, tax advice, offshore investments and estate planning.
Inheritance and estate planning can be complex and overwhelming, especially during the emotional time following a loved one’s death. One tool that can help manage this process is a deed of variation. If you’ve recently received an inheritance and are wondering how to best handle it, understanding the benefits and drawbacks of a deed of variation is crucial.
What is a Deed of Variation?
A deed of variation is a legal document that allows beneficiaries to change the way an inheritance is distributed after the death of a loved one. This can only be done within two years of the person’s death. Essentially, it allows you to alter the original terms of the will, enabling you to redistribute your inheritance in a way that might be more beneficial for you and your family.
Benefits of Using a Deed of Variation
1. Tax Efficiency:
One of the main reasons to consider a deed of variation is to for tax efficiency. If the original will could present a potential future inheritance tax liability on the beneficiaries, you can redistribute assets in a way that minimises this burden.
2. Flexibility:
Life can change a lot between when a will is written and when it comes into effect. A deed of variation provides the flexibility to adjust the distribution of the estate to reflect current circumstances, like changes in family dynamics, financial status, or health conditions of the beneficiaries.
3. Generational Planning:
A deed of variation allows you to think ahead and plan for future generations. For instance, you might want to pass assets directly to your children or grandchildren, helping them with future needs such as education or buying a home. This can also help manage future tax liabilities and ensure that wealth is distributed across generations in a thoughtful manner.
Real-Life Example: Gifting to Children
Let’s consider a real-life scenario. Suppose your father, John, passes away and leaves his estate to you and your sibling. Both of you are financially stable, subject to higher rates of income tax and following the gifts, would place you in excess of your available nil-rate bands for inheritance tax purposes. By using a deed of variation, you can redirect a portion of your inheritance to your children, John’s grandchildren. This not only reduces your potential inheritance tax liability but also provides financial support for your children’s future needs, like education or buying a house.
How a Deed of Variation Works
If you decide a deed of variation is right for you, here’s how the process typically works:
1. Agreement Among Beneficiaries:
All affected beneficiaries must agree to the proposed changes. This consent must be given freely and without any pressure.
2. Legal Documentation:
The changes need to be formalised through a legal document, clearly stating the new distribution of the estate.
3. Submission to Relevant Authorities:
To benefit from any potential tax advantages, the deed of variation should be submitted to HM Revenue & Customs (HMRC) within two years of the date of death.
Disadvantages and Considerations
While a deed of variation offers many benefits, it’s important to consider the potential drawbacks:
1. Legal Cost:
Drafting a deed of variation requires legal expertise, which can be costly. Fees can vary depending on the complexity of the estate and the nature of the variation. You’ll need to weigh these costs against the potential tax savings and other benefits.
2. Family Disputes:
Since the process requires unanimous agreement among all affected beneficiaries, disagreements or misunderstandings can lead to family disputes, complicating the process and creating emotional strain.
3. Complexity:
The legal and tax implications of a deed of variation can be complex. It’s crucial to have a clear understanding of these implications to avoid unintended consequences.
4. Time Constraints:
The two-year time limit for enacting a deed of variation can be restrictive. Beneficiaries need to act promptly to ensure the changes are made within this period.
Conclusion
A deed of variation can be a valuable tool in estate planning, offering significant benefits in terms of tax efficiency and flexibility. It allows you to adjust the distribution of an estate to better suit current needs and circumstances. However, it’s essential to carefully consider the associated legal costs, the potential for family disputes, and the complexity of the process.
If you think a deed of variation might be right for you, you should discuss your specific situation in more detail with professional financial and legal experts to ensure that any changes you make are in your best interest and comply with all legal requirements.
Remember, while a deed of variation can offer substantial benefits, it’s not a decision to be taken lightly. Engaging the services of a qualified solicitor and consulting with a tax specialist are crucial steps to ensure that the variation achieves the desired outcomes and complies with all legal requirements. Together, it will allow you to make informed decisions that align with your long-term financial goals and family dynamics.