Anna Sutcliffe of Wright Hassall explains the reasons why a will may be altered post-death.

To have peace of mind that your affairs will be managed in accordance with your wishes when you die, you should have a properly drafted will in place.

But even when such a document has been prepared, unforeseen circumstances may require your will to be altered after you have died. Typically, this will be by way of executing a deed of variation.

Variations can also be made where there is no will and the beneficiaries (under the intestacy rules) agree between them to vary the distribution of assets. 

What is a deed of variation?

A deed of variation is a document that allows a beneficiary of an estate to alter their entitlement from that estate (such as land, a share of the residuary estate or cash). The deed allows the beneficiary to redirect their entitlement to another person, without suffering any tax consequences. 

The effect of the deed is that the terms of the document are regarded as being written back into the will, as if the new gift had, in fact, been made by the deceased. 

What are the requirements of an effective deed of variation?

In order to be effective for inheritance tax purposes, a deed of variation must:

• be made within two years of the death
• be signed by all beneficiaries who ‘lose out’ as a result of the variation
• clearly identify the part of the estate being varied and who is to benefit from the variation
• include in a prescribed form a statement that the beneficiaries intend the variation to be effective for inheritance tax and/or capital gains tax
• an application to the court for consent if the beneficiaries are under 18

When might it be necessary to vary a will?

There are a number of occasions when the option of altering a will post-death may be helpful:

• If there is a dispute/claim as to the validity of a will

It may be that there is a dispute as to whether a will is valid. For example, it may be alleged that when the will was made, the testator did not have the required mental capacity, did not understand the nature and effect of the will, or was subject to undue influence. If a claim of this nature is successful, it would result in the will being invalid. 

Given the stress, cost and delay caused by litigation, the parties may wish to achieve certainty and a swift conclusion by reaching a settlement between themselves. Such a settlement can be recorded within a deed of variation. 

• A claim under the Inheritance (Provision for Family and Dependants) Act 1975

The act allows certain categories of person to claim against an estate where a will, or the intestacy provisions, are claimed not to make reasonable financial provision for the claimant. If such a claim is successful, or the parties are able to achieve an amicable solution, the new arrangements can be recorded in a deed of variation.

• Reduce the amount of inheritance tax payable

A person receiving assets under a will who is already subject to higher rate tax may wish their entitlement to pass elsewhere, as doing so could be more tax efficient. For example, a beneficiary of an estate who is a higher rate tax payer may decide to pass their inheritance to their children outright, or potentially into a discretionary trust for their benefit, in order to avoid the funds being taxed at 40 per cent.

While the beneficiary could receive the monies and make gifts, if they were to die within seven years of the date of those gifts, their value would be taken into account when calculating the inheritance tax on their estate. 

Being able to pass assets on to the next generation, or to others who are in greater need of funds, may ultimately be more tax efficient. And it may be desirable to redirect assets that qualify for relief from inheritance tax from an exempt beneficiary to a non-exempt beneficiary, to prevent the relief from being wasted.

For example, if there are assets qualifying for agricultural relief, and these passed to a spouse as part of the residuary estate, then the agricultural property relief will not apply, because the beneficiary is already exempt from inheritance tax. It may be more efficient for the asset to pass elsewhere. 

• Possible capital gains tax saving

If there is an asset that has risen in value dramatically since the date of death, it could be transferred to a beneficiary with a significant capital loss, meaning that there will be minimal capital gains tax on the disposal. 

What are the advantages of a deed of variation?

The chief advantages spring from the retrospective treatment, ie from death, of the variation. It is this that can make it an effective form of estate planning. 

It also allows a beneficiary some say in redirecting their entitlement. An alternative for a beneficiary who does not want to benefit from an estate is that they can disclaim their interest, ie refuse it completely. To be able to do so, they must not have accepted any benefit from it before disclaiming. It also means that they have no control over who should receive the benefit in their place. 

The will may say what will happen if a gift is disclaimed. If it does not, the property will be returned to the estate. If the gift was a pecuniary or specific legacy, it will fall into the residuary estate. If it is a gift of residue, it will fall under the intestacy rules. 

It is always best to make a properly considered will and to seek to mitigate tax liability prior to death, where possible. However, it may be that a deed of variation could be a useful tool in seeking to resolve issues that arise after someone has died. 

Bear in mind that if a will is varied with the intention of avoiding care home costs, the local authority can ignore the variation when making its assessment. In addition, there is no guarantee that deeds of variations will not be abolished in the future, given that they are used in the main to achieve tax savings for beneficiaries. 

About the author

Anna Sutcliffe is a solicitor at Wright Hassall LLP, @Wrighthassall. She offers specialist advice about inheritance disputes, including claims under the Inheritance (Provision for Family and Dependants) Act 1975, disputes between executors, and claims in respect of the validity of wills. 

• How can a disappointed beneficiary challenge a will?
• Estate planning: the 14 year inheritance tax rule

Publication date: 21 December 2016