Ruth Pyatt, solicitor at Steeles Law, considers the importance and purpose of deeds of variation.
For some 20 years, there have been rumours of the abolition of deeds of variation. There has been some well-known recent cases involving deed variation, which have been well documented in the media – including most recently a deed of variation to the estate of Ed Miliband’s father – which was more than reminiscent of the scandal some 15 years ago surrounding deeds of variation to the estate of the late Tony Benn.
The issue is, once again, on the political agenda. George Osborne announced in the Budget that the government would review the avoidance of inheritance tax through deeds of variation.
The juxtaposition of this review, with the announced crackdown on diverted profits (the so-called ‘Google tax’) and the introduction of new criminal sanctions for tax evasion, has left many feeling that the humble deed of variation, a lifeline for family solicitors and their clients for generations, has been rather tarnished by association.
So what is a deed of variation, and why is it important?
At its most simple, a deed of variation is a deed by a beneficiary (to a deceased’s estate) who wishes to alter what they are entitled to receive under the terms of the will, or under the rules of intestacy.
If a beneficiary opts to disclaim their right to inherit, the will or the rules of intestacy would determine who would benefit from the disclaimed part of the estate. But where a beneficiary opts instead to execute a deed of variation, that beneficiary has the freedom to choose who they wish to benefit from their share of the estate.
For property law purposes, the effect of the deed of variation is that the original beneficiary has made a gift of the redirected interest to the recipient (so a deed of variation cannot be used to avoid creditors).
However, legislation in terms of the Inheritance Tax Act 1984 (IHTA 1984) s.142 and the Taxation of Capital Gains Act 1992 (TCGA 1992) s.62(2) allows the original beneficiary to make an election for either inheritance tax purposes or capital gains tax purposes, or both. The effect of such an election is that for inheritance tax and/or capital gains tax purposes, the recipient is deemed to have inherited from the deceased, rather than received a gift from the original beneficiary.
S.142 IHTA 1984 prescribes that the variation must:
- be in writing
- be made by the person who would have benefited from the original gift
- be made within 2 years of the death
- not be made for consideration or money’s worth
- contain a statement that s.142 IHTA 1984 is to apply
S.62(6) TCGA 1992 is similarly prescriptive. If a variation meets the requirements of the tax legislation, significant tax savings can be made.
Pre-2007 and the introduction of the inheritance tax transferable nil-rate band, deeds of variation were often utilised to redirect assets away from a surviving spouse (and to pass wealth tax-free to the next generation).
Post-2007, deeds of variation are commonly used for a variety of purposes, including:
A reported 30% of the population die without leaving a will. Where there is agreement between those who are due to benefit under the rules of intestacy, a deed of variation can be used to ensure the estate is distributed according to the needs and wishes of the survivors and can, in some cases, permit a surviving spouse to retain their home.
Change of circumstances
Deeds of variation are also known as deeds of family arrangement, and it is often the case that the family of a deceased will agree between themselves that wealth should be shared other than had been conceived by the deceased. Families may enter into such agreements where there has been a change in circumstances for one or more of the family members (since the will was prepared or within the two years from the date of death) or because of, for example, perceived unfairness or error in the original will.
36% IHT tax rate, and other reliefs
Since the introduction of the 36% rate in April 2012, deeds of variation are now commonly used to secure the 36% rate (by ensuring that 10% of the deceased’s net estate passes to charity). Similarly, deeds of variation are also used to ensure that other reliefs, such as business property relief and agricultural property relief, are utilised (by diverting assets from a surviving spouse).
Deeds of variation are therefore specifically provided for in tax legislation and are for tax planning purposes.
How, then, did it come to be that deeds of variation are now seen by many as tax avoidance and a ‘popular legal loophole’? That is not an easy question to answer. Though there does not appear to be any direct case law on the subject (the nearest being the case of Cancer Care Research Campaign v Ernest Brown  STC 1425), many advisers consider that they have a duty to advise beneficiaries of the advantages that can be gained from deeds of variation and find the idea that such advice may make them complicit in some form of illegal conduct quite inconceivable.
In the end, it may be that the scope of George Osborne’s review, and the subject of the report that is due to follow in the autumn, will be restricted to the types of scheme involving deeds of variation that HM Revenue & Customs already consider to be tax avoidance, such as original non-exempt beneficiaries redirecting legacies to an exempt beneficiary, on the understanding that they will receive it back as a lifetime gift. The announcement of such a review, however, would be unlikely to make the headlines.
About the author
Ruth Pyatt is a solicitor at Steeles Law and advises on wills, inheritance tax, estate planning and probate, lasting powers of attorney and the creation and administration of trusts.