Deeds of variation in one paragraph: within 2 years of a death, a beneficiary can rewrite the deceased's will or intestacy distribution by signing a deed of variation. For inheritance tax and capital gains tax purposes, the variation is treated as if the deceased had made it — the change works "retrospectively" for tax. Most common uses: skip a generation to grandchildren, equalise unequal bequests, redirect to charity for the 36% IHT rate, or fix an outdated will.
The legal requirements
A valid deed of variation must:
- Be in writing — usually a formal deed drafted by a solicitor.
- Be made within 2 years of the deceased's death.
- Be signed by all beneficiaries who lose out from the variation.
- Contain explicit statements that the variation is to apply for IHT purposes (s142 IHTA 1984) and/or CGT purposes (s62 TCGA 1992).
- Not involve "consideration" between beneficiaries (i.e., the original beneficiary isn't being paid by the new beneficiary for the change).
If any condition fails, the variation may still be legally effective between the parties but won't get the tax treatment.
The retrospective tax effect
The killer feature: the variation is treated as if it had been the deceased's original disposition. So:
- The original beneficiary doesn't pay CGT or income tax on having received-then-passed-on an asset.
- The new beneficiary takes the asset at base cost = date-of-death value, not the original beneficiary's higher base.
- For IHT, the variation may reduce or increase the estate's IHT depending on who the new beneficiary is.
This is unique to deeds of variation. Any other gift between beneficiaries would be treated as a new transfer (potentially a PET) with the 7-year clock and CGT consequences.
Common use cases
1. Generation-skipping to save future IHT
The deceased's adult children, who don't need the inheritance, can vary the will to pass directly to grandchildren. The benefit:
- The children's own estates don't grow with the inheritance — reducing their future IHT exposure.
- The grandchildren get the asset earlier (good for them economically).
- The deceased's estate IHT is unchanged.
2. Equalising bequests
The will might have been drafted unequally (e.g., one child got the house, another got cash, but house value has changed). Beneficiaries can agree to redistribute via a deed.
3. Redirecting to a charity for the 36% rate
If at least 10% of the net estate passes to charity, the IHT rate on the rest drops from 40% to 36%. A beneficiary can vary the will to direct some of their inheritance to a charity, triggering the rate reduction. The non-charitable beneficiaries net more after tax.
4. Fixing an outdated will
The deceased may have written a will 20 years ago that didn't account for current family circumstances (new spouses, divorced spouses, children with disabilities). A deed can update it.
5. Setting up a discretionary trust
Particularly to use the deceased's nil-rate band for future wealth, or to protect inherited assets for beneficiaries who can't yet manage them.
Worked example: generation-skipping with IHT and tax saving
Mrs M dies in 2026 with an estate of £900,000 entirely going to her only son (no spouse). Estate value:
- NRB (£325,000) + RNRB (£175,000) = £500,000 tax-free
- Excess £400,000 taxed at 40% = £160,000 IHT
- Son inherits £740,000 net.
Son already has his own estate of £2m. His own death would create another IHT charge on this inheritance.
Variation: son agrees within 2 years to pass £300,000 of his inheritance to his daughter. The variation is treated as if Mrs M's will had gifted £300,000 to her granddaughter direct.
- Mrs M's estate IHT unchanged at £160,000 (the gift to granddaughter is taxable from her estate the same way).
- Son's own future estate is £300,000 smaller — saving £120,000 of future IHT on his death.
- Daughter gets the money at age 25 instead of waiting for father's death.
Net family saving from the variation: £120,000 of future IHT.
The CGT angle
The CGT treatment in a deed of variation is potentially distinct:
- If you include a CGT statement (s62 TCGA 1992), the new beneficiary gets the date-of-death base cost on assets.
- Without the CGT statement, the variation is treated as a gift between the original and new beneficiary — potentially triggering CGT for the original beneficiary if they've held the asset.
- Almost all professionally-drafted deeds include both IHT and CGT statements.
Limits and traps
- 2-year deadline is absolute. Day 731 after death — too late.
- All affected beneficiaries must sign. If even one beneficiary refuses, the deed cannot proceed for tax purposes.
- "Consideration" rule. If the original beneficiary receives anything in return for varying (cash, other property, even an indemnity), the variation fails for tax. The variation must be genuinely gratuitous.
- Cannot harm minors without court approval. If a minor or unborn beneficiary loses out, the court may need to approve the variation.
- Affects means-tested benefits. Redirecting an inheritance can be treated as deprivation of assets for benefits purposes — affecting Pension Credit, care fees assessments, Universal Credit.
- Income tax is not retrospective. Unlike IHT and CGT, income tax on income arising between death and variation can't be "undone" by the deed.
What about the deceased's pension?
Pension death benefits are outside the estate (if discretionary) so a deed of variation doesn't apply. The pension scheme administrator decides nominations and beneficiaries.
If the deceased's pension is paid as a lump sum to the estate (rather than to nominated beneficiaries), it forms part of the estate and could be subject to a variation in theory — but this is rarely the optimal route.
Common deed-of-variation mistakes
- Waiting too long. The 2-year window seems generous but is easy to miss when grieving. Start the conversation early.
- Drafting without professional advice. Even simple deeds can fail for tax if a statement is missing. A few hundred pounds of legal cost saves potentially tens of thousands of tax.
- Ignoring the CGT statement. Easy to omit. Always include both s142 and s62 statements.
- Not consulting all beneficiaries early. A holdout beneficiary kills the deed. Discuss before drafting.
- Forgetting benefits consequences. A redirection that loses a recipient their means-tested benefits is rarely worth the tax saving.
- Using a deed for an asset already disposed of. Variations work on assets still in the estate / beneficiary's hands — not on cash already spent.
Sources
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