Tax planning using Deeds of Variation

Deeds of Variation allow for tax planning opportunities by effectively rewriting the will for inheritance tax (IHT) and capital gains tax (CGT) purposes.

A statement applying s.142 IHTA 1984 allows beneficiaries of a will to transfer assets received to another individual without IHT consequences.

There is no transfer of value by the person making the variation, with the amended gift deemed to have been made by the deceased.

This means that the tax planning window does not necessarily close at the date of the taxpayer’s death.

A variation does not have to be made by deed – it can be done by letter or other formal document.

The statement must be made within two years of death, it must be in writing and signed by the person, or persons, making the variation.

Variations can be made in respect of property passing under the law of intestacy. They can also be used to sever a joint tenancy so that the property can be passed under the will.

Any transfer must not be made in return for consideration in money or money’s worth. “Consideration” does not include the making of another variation to which s.142 applies. This allows beneficiaries to “swap” assets acquired under a will.

An election is also possible under s.62 TCGA 1992. This deems the deceased as making the transfer of an asset for CGT purposes.

There is no disposal by the person making the variation and the new beneficiary will acquire the asset at probate value. This cancels any gain in the hands of the person making the variation.