Cara Grant, Private Client Partner, discusses how and why after-death variations are used by beneficiaries of an estate.
What is a variation and why is it made?
A variation is a device that is available to a beneficiary of a deceased’s estate who wants to alter what they are entitled to receive from the estate, such as land, cash, a share in the residuary estate or a beneficial interest in a trust. The variation is usually recorded in a ‘deed of variation’.
A variation works by allowing a beneficiary to rearrange or redirect the interest that came to them originally from the deceased’s estate. In effect, the beneficiary is transferring to another beneficiary some or all of the interest they have inherited. The transfer is usually made by way of a gift.
Reasons for making a variation
A beneficiary may want to redirect the assets to which they would otherwise be entitled from a deceased’s estate for a number of reasons. For example, to:
- Provide for others who are in greater need of funds or other resources than the original beneficiary
- Save tax by:
- Giving additional assets to a beneficiary who is exempt from inheritance tax, such as a charity either by reducing the overall charge to tax or by giving 10% or more of the net estate to charity so as to benefit from a lower 36% rate of inheritance tax;
- Redirecting assets qualifying for relief from inheritance tax from an exempt beneficiary to non-exempt beneficiaries so that the relief is not wasted. For example, if a deceased’s estate includes assets that qualify for relief from inheritance tax, such as business or agricultural assets, and their spouse inherits these assets as part of the residuary estate, then the relief is wasted because the beneficiary of them (the spouse) is exempt from inheritance tax anyway; or
- Using the deceased’s inheritance tax allowance by creating a discretionary trust or making a gift of equivalent value;
- Using the deceased’s residence allowance by redirecting the deceased’s interest in a residential property to their descendants.
Advantages of a variation
As a way of making alterations to the distribution of an estate after death, a variation has several advantages:
- It allows the original beneficiary to control the redirection of either all or part of their interest in the estate, for example, to another individual, a charity or a trust of their choosing;
- It can be made either during the administration of an estate or after it has been finalised, when assets may already have transferred to the original beneficiary;
- It can have a retrospective effect for inheritance tax and capital gains tax purposes, allowing for the variation to avoid tax charges that may otherwise arise, provided that the deed of variation is made within 2 years of the deceased’s death. If certain conditions are met, the transfer effected by the deed of variation can be treated as having been made by the deceased rather than the beneficiary, consequently avoiding a charge to inheritance tax and capital gains tax on the beneficiary’s gift.
Deeds of variation are a useful planning tool, but their future for tax planning purposes cannot be guaranteed.