The following Trusts and Inheritance Tax guidance note by Tolley provides comprehensive and up to date tax information covering:
Beneficiaries of a deceased estate may vary the disposition of the estate by agreement. They may decide to surrender to or exchange their entitlement with other beneficiaries, or they may decide to benefit someone who was not originally included. All the beneficiaries affected by the changes must be aged 18 or more and of sound mind. If the proposals would affect minor or unborn children then a court order approving the changes is required.
Without special tax provisions, a post-death re-arrangement would not affect the tax position on death. It would be a lifetime gift by the beneficiary who is surrendering part or all of his entitlement. However, there are provisions for both inheritance tax and capital gains tax (CGT) which allow the beneficiary’s gift to be taxed as though it had been made by the deceased.
Such a variation or re-arrangement is popularly referred to as a ‘deed of variation’ because the terms of the agreement are usually set out in a formal deed. There is no general requirement for the agreement to be by deed; the legislation simply prescribes an ‘instrument in writing’ for the tax consequences to be effective. The document should, therefore, be described more correctly as an ‘instrument of variation’, although the popular term is used in this guidance note.
The effect of a deed of variation is to ‘read back’ into the Will (or amend the intestacy provisions to) the terms of the new agreement. Variations may secure more favourable tax treatment or undo previous tax planning that is no longer appropriate. They are also useful in cases having nothing to do with tax, such as settling a dispute. It is a fact that people do not update their Wills, if they have one at all, as often as they should. A deed of variation offers the opportunity effectively
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