Deed of Variation: Redirecting Inheritance to Reduce IHT
A deed of variation lets beneficiaries redirect an inheritance within two years of death — and for tax purposes, it is treated as if the deceased had made the arrangement themselves. This powerful tool can save thousands in inheritance tax, but it must be done correctly and within strict time limits.
Note: This article is for educational purposes only. Deeds of variation have legal and tax implications that depend on individual circumstances. Always consult a solicitor before executing a deed of variation.
Deed of Variation — Key Facts
What Is a Deed of Variation?
A deed of variation (sometimes called a deed of family arrangement) is a legal document that changes how an estate is distributed after someone has died. Instead of inheriting what the will (or intestacy rules) gives them, beneficiaries agree to redirect some or all of their inheritance to someone else.
The critical feature for tax planning is that HMRC treats the variation as if the deceased had made the arrangement themselves. This means:
- The redirected assets are taxed as if the deceased left them directly to the new recipient
- The original beneficiary is not treated as making a gift (so no PET or CLT arises)
- Reliefs and exemptions are applied as if the will had always contained the varied terms
How It Reduces IHT
A deed of variation can reduce IHT in several ways:
1. Redirecting to a spouse
If the deceased left assets to children or other beneficiaries and there is a surviving spouse, the children can redirect their inheritance to the surviving spouse. The spouse exemption means no IHT is due on the redirected assets.
2. Redirecting to charity
Beneficiaries can redirect part of their inheritance to charity, which is exempt from IHT. If the total charitable gifts reach 10% of the net estate, the IHT rate drops from 40% to 36% on the rest.
3. Skipping a generation
A beneficiary can redirect their inheritance directly to their own children (the deceased's grandchildren). This avoids the assets being taxed twice — once in the deceased's estate and again in the beneficiary's estate.
4. Redirecting to a trust
Assets can be redirected into a discretionary trust, which may be useful for protecting assets or providing for vulnerable beneficiaries.
Rules and Time Limits
For a deed of variation to be effective for IHT purposes, all of these conditions must be met:
- Within two years of death: The deed must be executed (signed) within two years of the date of death. This is a strict deadline with no extensions.
- In writing: The variation must be in a written document (not just an informal agreement).
- Contains the required statement: The deed must include a statement that the parties intend sections 142 and 144 of the Inheritance Tax Act 1984 to apply.
- No consideration: The person redirecting their inheritance must not receive anything in return (money, assets, or other benefits). If they do, the variation is not effective for tax purposes.
- All affected beneficiaries agree: Everyone who is giving up or redirecting assets must sign. Beneficiaries under 18 or lacking mental capacity require a court order.
A deed of variation cannot be used to vary a previous deed of variation. Each asset can only be varied once. Plan carefully before executing a deed.
Three Common Uses with Examples
George dies and leaves his entire estate of £800,000 to his two adult children (£400,000 each). His wife Mary is still alive. Without variation, IHT of £190,000 is due (£800,000 − £325,000 NRB − £175,000 RNRB = £300,000 × 40%, but George didn't leave the home to descendants via will).
The children execute a deed of variation redirecting the estate to Mary. The spouse exemption means no IHT is due. Mary can then plan her own estate, potentially using both her NRB and George's transferable NRB.
| Without variation | With variation | |
|---|---|---|
| Estate to children | £800,000 | £0 |
| Estate to Mary | £0 | £800,000 |
| Spouse exemption | N/A | £800,000 |
| IHT due on first death | £190,000 | £0 |
Saving: £190,000 — though IHT may ultimately be due on Mary's death, the family gains time for planning and the benefit of two sets of allowances.
Barbara dies with an estate of £600,000. She leaves everything to her son James. The baseline IHT is £110,000 (£600,000 − £500,000 = £100,000 × 40%, assuming RNRB applies... actually let's simplify).
| Without variation | With variation | |
|---|---|---|
| Gross estate | £600,000 | £600,000 |
| Less: NRB + RNRB | −£500,000 | −£500,000 |
| Net estate for IHT | £100,000 | £100,000 |
| Charitable gift (10% of net estate) | £0 | £10,000 |
| Taxable amount | £100,000 | £90,000 |
| IHT rate | 40% | 36% |
| IHT due | £40,000 | £32,400 |
| James receives (after IHT and charity) | £560,000 | £557,600 |
James gives £10,000 to charity via deed of variation. The IHT rate drops to 36%. He loses £10,000 to charity but saves £7,600 in IHT — a net cost of only £2,400 for a £10,000 charitable donation.
Patricia (70) inherits £200,000 from her mother. Patricia's own estate is already £500,000. If she keeps the inheritance, her estate rises to £700,000 — meaning more IHT on her death.
Instead, Patricia executes a deed of variation redirecting the £200,000 directly to her two grandchildren. Because the variation is “read back” to her mother, it is not treated as a gift from Patricia — so there is no PET and no seven-year clock.
The £200,000 skips Patricia's estate entirely, potentially saving her family up to £80,000 in IHT (£200,000 × 40%).
What a Deed of Variation Does Not Do
- Does not change the will: The will remains as written. The deed changes the distribution for tax purposes only. For all other legal purposes, the beneficiaries are treated as having inherited and then redirected.
- Does not work for lifetime gifts: A deed of variation only applies to assets passing on death (whether by will or intestacy). It cannot be used to vary lifetime gifts.
- Does not override the two-year deadline: If the deadline passes, any redirection by beneficiaries is treated as a normal gift (PET or CLT) from the beneficiary, with full IHT implications.
- Cannot be used to benefit the person making the variation: If the person redirecting their inheritance receives any consideration in return, the variation fails for tax purposes.
Cost and Process
The process for a straightforward deed of variation is:
- Identify the opportunity (which assets to redirect and to whom)
- Get agreement from all affected beneficiaries
- Instruct a solicitor to draft the deed (typically £500–£2,000)
- All affected beneficiaries sign the deed
- Notify HMRC if IHT has already been paid (a recalculation may be needed)
- If property is involved, update the Land Registry (additional fees apply)
| Complexity | Typical cost | Examples |
|---|---|---|
| Simple (cash/investments) | £500–£1,000 | Redirecting savings to a spouse or charity |
| Moderate (property involved) | £1,000–£1,500 | Redirecting a property share, updating Land Registry |
| Complex (trusts, multiple parties) | £1,500–£2,000+ | Creating a trust via variation, multiple beneficiaries |
Typical solicitor fees — costs vary by firm and region
Frequently Asked Questions
How long do you have to make a deed of variation?
A deed of variation must be executed within two years of the date of death. There is no extension to this deadline, even if probate takes a long time to obtain. The deed must also state that it is intended to take effect for IHT (and/or CGT) purposes under sections 142 and 144 of the Inheritance Tax Act 1984.
Do all beneficiaries need to agree to a deed of variation?
Only the beneficiaries who are giving up or redirecting their inheritance need to agree and sign the deed. Beneficiaries who are receiving assets under the variation do not need to sign. If any affected beneficiary is under 18 or lacks mental capacity, a court order is required.
Can you redirect an inheritance to a trust using a deed of variation?
Yes. A common use is to redirect assets into a discretionary trust. Because the variation is treated as if the deceased made the arrangement, the transfer into trust is not treated as a chargeable lifetime transfer by the beneficiary. This can be useful for protecting assets for future generations.
Does a deed of variation affect capital gains tax?
It can. If the deed includes a statement under section 62(6) of the Taxation of Chargeable Gains Act 1992, the variation is also treated as if the deceased had made the arrangement for CGT purposes. This means the new beneficiary acquires the asset at its probate value, not its value at the date of variation.
How much does a deed of variation cost?
A straightforward deed of variation drafted by a solicitor typically costs £500–£2,000 depending on complexity. If the variation involves property, there may be additional conveyancing costs and Land Registry fees. For simple variations, some solicitors offer fixed fees.
Can the executor do a deed of variation?
No. Only the beneficiaries (those who inherited) can execute a deed of variation. The executor's role is to distribute the estate according to the will (or intestacy rules). However, the executor may need to be involved if the variation changes the distribution — for example, to redirect assets that haven't yet been distributed.
Understand Your Estate's IHT Position
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