The Chancellor announced this week in his Budget speech that there is to be a review on the rules about deeds of variation. This will take place over the new few months and the report will be released in the Autumn, promising to draw on a ‘wide range of views’.
It may turn out to be a politically motivated announcement to remind the electorate of the alleged use of such arrangements by the leader of the opposition, with the report providing little by way of indication of the underlying thinking. This is unlikely, but we must wait and see.
Nonetheless, whatever lies behind this, it does call into question the ability of private client practitioners to use deeds of variation to rearrange dispositions under wills or intestacy, whether to make those dispositions more fair and / or more tax effective.
The previous method of rearranging such dispositions was set out in the Finance Act 1975 s74 and the instruments which introduced what were commonly known as deeds of family arrangement. There was no direct definition of what such deeds could do; however HMRC was of the view that using such an instrument one could rearrange dispositions under a will or intestacy and redistribute property within the family or to beneficiaries under the will or intestacy. The relief from tax given only applied if the deed of family arrangement varied dispositions between existing beneficiaries or within a family, and did not apply if a ‘stranger’ were introduced as a beneficiary.
Deeds of variation, as currently used, give effect to a redistribution of assets in a deceased’s estate. For inheritance tax purposes the changes are read back as if made in the will or under the intestacy. As the Chancellor has hinted, deeds of variation are frequently used to mitigate inheritance tax but they do also have value, for example, in enabling a redistribution of assets to take account of changed family circumstances; an obvious example is children who inherit under the will of a parent using a deed of variation to pass assets to their own children (the testator’s grandchildren), reducing the overall liability to tax, and also putting assets into the hands of their children at an earlier age than might otherwise have been anticipated.
The deed must be executed by all beneficiaries whose interests are being reduced and it must be signed within two years of the date of the deceased’s death. Executors or administrators must be parties to the deed where the effect is to cause a greater inheritance tax liability and it is recommended that they be parties even if that is not the case so that they are formally on notice of the changes to the devolution of the assets. Deeds of variation do not affect the income tax position. Any variation effected under the current legislation cannot be re-varied, which makes it essential to get it right in the first place.
The review of the rules may restrict deeds of variation so that they follow the structure of the older deed of family arrangement or the review may recommend they are abolished in their entirety. Either way, it is something to be considered as in the future there might not be opportunity to rearrange the disposition of an estate after death. It would be sensible for clients and practitioners regularly to review wills in place and any other post-death arrangements so that they are kept in line with changes in taxation and family circumstances. And, if a variation is being considered, it will be wise to take action sooner rather than later.