Deeds of Variation — a guide to gifting your inheritance

If you’ve inherited a significant sum — or are expecting to — a Deed of Variation can help to reduce your own Inheritance Tax (IHT) bill and protect your estate — especially with changes to IHT coming into force next year. 

There’s nothing to stop you from simply giving away part or all of your inheritance, but if you’re considering gifting a significant amount, you should consider ‘varying’ your share of the estate by entering into a Deed of Variation. 

Here, Helen Dawson — a Senior Associate in our estate planning team — explains more.

What is a Deed of Variation?

A Deed of Variation allows you to redistribute your inheritance for tax efficiency, avoiding the seven-year wait for tax exemption on large gifts. Without one, a significant gift could still be taxed as part of your estate if you pass away within seven years.

What is a Potentially Exempt Transfer and how can you avoid it?

Without a Deed of Variation, your gift would be a Potentially Exempt Transfer (PET) for UK inheritance tax (IHT) purposes. Under current rules, you need to survive for seven years after making the gift for the value of that gift to not be included within your estate. 

By entering into a Deed of Variation, the gift wouldn’t be treated as a PET. Instead, it would be treated as a gift made to the new beneficiary from the estate you’ve inherited from (rather than your own) for IHT purposes. Therefore, the value of the gift is removed from your estate and the seven-year survival rule would no longer apply. 

Another option is to use a Deed of Variation to redirect your assets into a trust — and be named as a potential beneficiary — which would avoid you being the settlor for IHT (you’d be treated as settlor for Capital Gains Tax and Income Tax purposes). This can be a very useful wealth planning tool — ensuring that you have access to your assets while keeping them outside of your estate for IHT purposes.    

What are the rules for entering into a Deed of Variation?

• It can be made in the first two years from the date of the deceased’s death.
• You don’t need to have received your inheritance yet. 
• You can make more than one variation, but you can’t vary the same asset twice.
• You can only give away what you’re entitled to as part of your inheritance.
• It doesn’t matter whether you inherit from a Will or under the intestacy rules. You can vary your share either way. 

Before entering into a Deed of Variation, it’s sensible to seek professional advice, as the tax and trust reporting implications of varying the estate need to be carefully considered and understood. The deed must also include certain declarations to ensure that the desired tax treatment is applied. 

Do the PET rules apply to charitable gifting?

If you wish to give away all or part of your inheritance to charity, the PET rules don’t apply and the gift won’t be subject to IHT — immediately reducing the value of your estate. 

However, it’s still worth considering whether a Deed of Variation is appropriate. If the gift that you’re making is significant, it could result in the estate you’re inheriting from being eligible for a lower rate of IHT at 36%, rather than 40%. It’s always worth checking with a professional adviser first.  

Talk to us

If you’re considering giving away part of your inheritance, our award-winning estate planning team is here to help. 

We can help you to put a Deed of Variation in place, regardless of whether we’ve been involved in the administration of the estate that you’re inheriting from. We’re also happy to work alongside your other trusted advisors. 

Talk to us by giving us a call on 0333 004 4488, sending us an email at privateclient@brabners.com or completing our contact form below.