Using a Deed of Variation for Succession Planning

Inheritance Tax planning does not always end when somebody dies. In the right circumstances, a Deed of Variation can provide an opportunity to reconsider how assets pass under a Will and create a more tax-efficient structure for the next generation.

This can be particularly valuable where property is involved. A decision that appears sensible from an Inheritance Tax perspective can create a very different Capital Gains Tax position later.

At Eaves & Co, we recently advised on a succession planning case involving a portfolio of properties where a 50% interest was due to pass to the deceased's widow. The family ultimately wanted that interest to pass to the children, so we considered whether simply following the Will was really the most effective route.

What Is a Deed of Variation?

A Deed of Variation allows beneficiaries to alter how an inheritance is distributed after somebody has died.

Provided the relevant conditions are met, a variation made within two years of death can be treated for Inheritance Tax and Capital Gains Tax purposes as though the deceased had made the revised arrangements themselves. A variation can also be used to move inherited assets into a trust.

This creates an important planning window. Rather than accepting an inheritance and then transferring assets afterwards, families can consider whether the original Will still provides the most appropriate outcome.

That distinction can have significant tax consequences.

The Property Succession Problem

In the case we advised on, the deceased owned a 50% interest in a number of properties. Under the Will, that interest was due to pass directly to his widow.

However, the intention was ultimately for the property interests to pass to their children. Simply allowing the widow to inherit the properties and gifting them to the children later could have created an unnecessary Capital Gains Tax exposure. Property values can increase after death and a later gift is itself a disposal for CGT purposes.

We therefore looked at whether the estate could be structured differently while still retaining the valuable spouse exemption for Inheritance Tax.

Using an IPDI Trust

The solution involved using a Deed of Variation to redirect the deceased's property interests into an Immediate Post-Death Interest (IPDI) trust for the widow.

Rather than the properties passing directly into her personal ownership, the trust provided her with the qualifying interest while creating a structure through which the assets could subsequently pass to the children.

Crucially, where the relevant conditions are satisfied, property passing into an appropriate qualifying interest in possession for a surviving spouse can still benefit from the spouse exemption for Inheritance Tax.

HMRC also confirms that a Deed of Variation can establish an interest in possession trust, provided the necessary conditions are satisfied.

Why Capital Gains Tax Was So Important

This was where the planning became particularly valuable. There is generally no Capital Gains Tax charge simply because somebody has died. Instead, inherited assets are normally treated as acquired at their market value at the date of death, effectively creating a new CGT base cost.

By using the Deed of Variation and trust structure, the deceased's 50% property interests benefited from that rebasing at death.

This meant there was an opportunity for the relevant interests to subsequently pass from the trust to the children without the historic gains that had built up during the deceased's lifetime forming part of the CGT calculation.

That was very different from simply allowing all of the property interests to become part of the widow's existing holdings and considering a transfer to the children at a later date.

Bringing Inheritance Tax and CGT Planning Together

The arrangement was not simply about reducing an immediate tax bill. It was about establishing a better route for transferring wealth to the next generation.

Once the relevant interests were appointed from the trust to the children, the Inheritance Tax treatment also needed to be considered carefully. In this particular structure, the termination of the qualifying interest and onward transfer could constitute a Potentially Exempt Transfer, meaning that, subject to the relevant conditions, the value could fall outside the widow's estate after seven years.

The exact treatment of a trust distribution depends on the structure and circumstances, so this is an area where specialist advice is essential rather than something that should be replicated from a general example.

Why Timing Matters With a Deed of Variation

There is a limited window in which this type of planning can take place. For the variation to obtain the intended retrospective IHT and CGT treatment, it normally needs to be completed within two years of death and satisfy the relevant statutory requirements.

That makes early advice extremely important. Once assets have been distributed or significant time has passed, some of the planning opportunities available immediately after death may disappear.

How Eaves & Co Can Help With Succession Planning

Succession planning often involves several different taxes at the same time. Inheritance Tax, Capital Gains Tax, trusts, property ownership and the beneficiaries' longer-term objectives all need to be considered together. Looking at one tax in isolation can result in a structure that solves one problem while creating another.

At Eaves & Co, we advise individuals and families on succession planning, Inheritance Tax, Capital Gains Tax and the tax implications of trusts and estates. We can also work alongside solicitors and other professional advisers where legal documentation or wider estate planning is required.

The aim is not simply to minimise today's tax bill. It is to create a sensible structure for passing wealth to the next generation.

Contact the Eaves and Co team

Frequently Asked Questions

What is a Deed of Variation?
It allows beneficiaries to change how assets from an estate are distributed after somebody has died. For certain tax purposes, a qualifying variation can be treated as though the deceased had made the revised disposition.

How long do you have to make a Deed of Variation?
To obtain the relevant retrospective tax treatment, the variation generally needs to be completed within two years of the death.

Can a Deed of Variation create a trust?
Yes. HMRC guidance confirms that a variation can establish an interest in possession or discretionary trust, subject to the relevant conditions.

Can a Deed of Variation reduce Inheritance Tax?
Potentially. A variation can change how an estate is distributed and may affect the available exemptions and overall IHT position.

Does property get a new Capital Gains Tax value when somebody dies?
Generally, assets passing on death are treated as acquired at their market value at the date of death for CGT purposes.

Should I speak to an accountant before completing a Deed of Variation?
Where tax planning is part of the reason for the variation, specialist tax advice should be taken alongside appropriate legal advice. The IHT, CGT and trust consequences can be significant.