Is the ability to vary terms of a will for tax reasons, through what are called "deeds of variation", to be restricted by the UK tax authority?

The UK’s tax authority, HM Revenue & Customs, on 15 July announced a review of how wills can be adjusted through deeds of variation for tax purposes. This article, by Rebecca B Wardle, private wealth associate at law firm Trowers & Hamlins, looks at the details.

On the 15 July 2015, HMRC announced there will be a review of the use of deeds of variation for tax planning purposes. The review was suggested in the March Budget and now the wheels have been put in motion via a formal consultation on their use. Deeds of variation are quite commonly used and any proposed changes may directly impact future inheritors. It is important to consider how you may be affected and whether your current will provides sufficient flexibility should the status quo change.  

A deed of variation is a device available to a beneficiary of an estate to change the interest that he/she receives from an estate. The variation could be used to redirect any assets that are inherited – for example, cash, land, or stocks and shares. It is available to a beneficiary where the deceased died either leaving a will – called in legal jargon "dying testate" – or without leaving a will, which is known as "dying intestate".

A variation effectively works by allowing a beneficiary to redirect to another person, trust or charity some or all of the inheritance that was first left to him/her.

There are many reasons why someone would opt to give away their inheritance, and deeds of variation are more frequently used than one might expect. A key reason for employing one is to provide for other family members who are perhaps in greater need of financial assistance.

Take, for example, a man in his late 50s who is due to inherit from his late mother's estate. He is, however, self-sufficient; he owns his own property, has ample cash in the bank and has a good pension. He has a daughter who is looking to buy her first property; he knows that she is unable to fund the purchase of the property without his assistance. He would like to help her, but most of his own money is tied up in the value of his home. He could, by deed of variation, direct some, or all, of the inheritance from his mother's estate to his daughter to assist her with her property purchase. He could direct the inheritance into a trust if he has concerns about his daughter spending the money outright, or about her getting into financial difficulty, or even marrying an unsuitable person. By allowing a beneficiary to make alterations to his/her inheritance, they can control the redirection, whether this is in whole or in part.   

Another key reason for considering redirecting assets is to save tax. Taking our man from the example above, it is likely that tax will have been paid on his mother's estate when she died. After he inherits the assets then there may be tax to pay when he dies. Therefore, when his daughter finally inherits, tax will have been paid twice on the same assets – which is in no one's best interests.

From a tax perspective and subject to certain criteria, a variation has a retrospective inheritance tax and capital gains tax effect. This means that the variation can be treated as being made directly by the deceased, rather than being treated as a gift being made by the original beneficiary. This can have tax benefits in itself.

A variation must be made within two years from the date of the deceased's death, so it is important to watch the clock. Now that HMRC is undertaking a review of their use, it is even more pertinent for heirs considering implementation of a variation to take action sooner rather than later.

If the ways in which deeds of variation can be used are changed, or even abolished, then it will be fundamental for individuals to ensure that they have a will in place which allows for the greatest possible flexibility on death, to take into account changes in circumstances. This may mean, for example, considering whether or not to bequeath assets directly to grandchildren rather than children or considering the use of a flexible trust in a will. 

Having these discussions with your family and advisors now could save future headaches and tax burdens for your heirs.  

Furthermore, there are occasions where deeds of variation are used to correct tax mistakes in wills. If deeds of variation are abolished completely, executors will be forced to rely upon making applications to the courts as the main source of remedy. In the absence of deeds of variation, we would likely see a considerable increase in the number of applications finding their way to the doors of the court, resulting in potentially costly legal and court fees.  

With the consultation now under way, all eyes are on HMRC and anticipating its next move. Responses must be sent in by 7 October this year.