Deeds of Variation and saving tax
A deed of variation is a deed entered into by a beneficiary of a Will varying their entitlement under the Will. To be effective for tax purposes, the deed needs to be made within two years of the date of death of the person making the Will and contain elections for inheritance and capital gains tax purposes. If effective the changes made by the deed to the Will shall be regarded as being made by the deceased for capital tax purposes.
For example, if Harry dies leaving his share portfolio to his son Joshua, Joshua may decide that he would like his daughter Charlotte to receive the gift instead. If Joshua executes a deed of variation within two years of Harry’s death substituting the gift of the shares to him with a gift to Charlotte instead, then there should be no capital gains tax on the gift (if the shares have increased in value). For inheritance tax purposes, the gift will be treated as being made by Harry. This means that there will be no tax implications for Joshua in making the gift even if he were to die shortly afterwards.
The beneficial tax consequences of a deed of variation are as a result of sections in the relevant capital gains tax and inheritance tax legislation so the deeds are a creation of Acts of Parliament. In the past, proposals were put forward to repeal this legislation and this must always be a risk for the future. At the moment, however, deeds of variation represent a legitimate means of varying a Will, and in some cases, as a result, making tax savings.