How can a Deed of Variation help with tax planning?

When someone passes away, the distribution of their assets is typically dictated by their Will or, in the absence of a Will, by intestacy rules. However, the way it is distributed might not always be the most tax efficient. A Deed of Variation can be a valuable tool to restructure the inheritance to benefit all parties involved while minimising tax liabilities.

What is a Deed of Variation?

A Deed of Variation is a legal document that allows the beneficiaries of an estate to alter the distribution of assets they are entitled to receive. To be valid, all affected parties must agree to the changes. It’s important to note that this deed doesn’t change the original will; instead, it redirects the inheritance as if the deceased had made the changes themselves.
To be effective for tax purposes, the Deed of Variation must be executed within two years of the deceased’s death. It can be applied whether the deceased left a Will or not.

How a Deed of Variation can reduce tax liabilities

Inheritance Tax (IHT) Liability is levied at 40% on estates exceeding the nil-rate band (£325,000 as of 2025). A Deed of Variation can help reduce this liability through several strategies:

Redirecting assets to a spouse or civil partner: Transfers between spouses are IHT-exempt. Varying the Will to leave assets to a surviving spouse can delay or avoid IHT.
Utilising the Residence Nil-Rate Band (RNRB): If the deceased’s Will doesn’t fully use the RNRB (applicable when passing a residence to direct descendants), a Deed of Variation can redirect property to children or grandchildren to maximise this relief.
Gifting to exempt beneficiaries: Redirecting inheritance to a charity makes it exempt from IHT. Moreover, if 10% or more of the estate is given to charity, the IHT rate on the remaining estate can drop from 40% to 36%.
Reducing Capital Gains Tax (CGT) exposure: When inherited assets such as property or shares are sold at a gain, the beneficiary may be subject to CGT. A Deed of Variation can help minimise CGT by transferring assets to a lower-rate taxpayer – a high-rate taxpayer can redirect assets to a lower-income family member, who would pay a lower CGT rate upon selling the asset.

Passing wealth down the generations efficiently

A Deed of Variation can be used to skip a generation, passing wealth to children or grandchildren instead of a surviving spouse who may not need the assets. This reduces the size of the spouse’s taxable estate, potentially lowering future IHT exposure.

Protecting means-tested benefits

An inheritance could push a beneficiary over the eligibility threshold for means-tested state benefits. A Deed of Variation allows them to redirect the inheritance to a trust or another family member, preserving their benefit entitlement.

Creating a Fair and Flexible Distribution

A Deed of Variation can rectify unintentional exclusions or changed circumstances, ensuring all parties receive a fair share while optimising tax benefits.

Important considerations

All affected beneficiaries must consent to the changes and the deed must be in writing, comply with legal requirements, and state that the changes should be treated as if they were made by the deceased person.

It also cannot be used to defraud creditors or evade debts.

Seeking professional advice

Given the complexities of tax laws, it is crucial to seek professional advice from a solicitor or tax adviser. This ensures the Deed of Variation is drafted correctly and achieves the desired tax savings, protects assets and ensures wealth is passed down efficiently.