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The Budget and Deeds of Variation

As mentioned in our coverage of the Budget an announcement was made in the Budget speech concerning Deeds of Variation but so far the only further information that we have on this is the bald statement in the Budget report that, “The Government will review the use of Deeds of Variation for tax purposes”. There is no indication as to how this review will be carried out or when but, given that Parliament is due to rise on 30th March for the General Election, nothing is likely to happen before the outcome of the election is known.

This is not the first time that Deeds of Variation have come under scrutiny. It was announced in a Budget in the late 1980s that they were to be abolished giving rise to an outcry and the subsequent withdrawal of the proposed legislation.

Why was there an outcry then and why is there likely to be one now if abolition is suggested following the Government’s review? Deeds of Variation enable beneficiaries to alter their entitlement under a deceased person’s Will within two years of the death and the relevant statutory provisions ensure that this can be done without any adverse tax consequences. Broadly, for Inheritance and Capital Gains tax purposes the altered Will provisions are regarded as having been put in place by the deceased. We included an example in our previous blog on this subject as to how this works in practice.

Deeds of Variation can be used to reduce the tax liability on an estate but that is usually because the Will that is being varied was not drafted in the most tax efficient way in the first place or has become outdated due to changes in tax legislation or the testator’s circumstances. A Deed of Variation is not usually putting in place any tax reduction that could not have been obtained had the testator had up-to-date advice on the best way to draft his Will.

A Deed of Variation can also be an invaluable tool if there is a disputed Will as the deed enables an agreed compromise to be put into place within the relevant time limits without incurring a tax disadvantage.

For these reasons, the abolition of Deeds of Variation or restrictions in their availability is likely to be resisted again and it will be interesting to see the outcome of the review once this has taken place.  We will keep you informed.