If a will is not fit for purpose or the estate could have been disposed of more efficiently from a tax point of view, all is not lost. It is possible to vary the disposition of an estate. Georgia Bedworth explains

In an ideal world, everyone would have a will which was up to date and took into account both family circumstances and the current tax legislation, making it both workable and tax-efficient. However, the world is not ideal, circumstances change, things happen unexpectedly and even the best laid plans go awry. Alternatively, there may not even be a will in place, leaving many solicitors who are approached  by clients after the death of a loved  one thinking ‘if only they had come to me sooner’.

It is important to remember that the dispositions in a variation are treated as having been made by the deceased for tax purposes only, and only then for the purposes of the tax for which an election has been made. In reality, the assets are transferred by the original beneficiary to the new beneficiary. This is particularly important if a will sets up a protective trust which the principal beneficiary wishes to vary

All is not lost if a will is no longer fit for purpose, or the estate could have been disposed of more efficiently from a tax point of view. It remains possible to vary the disposition of an estate, so that the dispositions are treated as having been made by the deceased for tax purposes. This gives rise to an opportunity to mitigate tax on the estate and potentially improve the tax planning position of the family as a whole.

The possibility of using deeds of variation to mitigate tax came under threat shortly before the 2015 general election. HM Revenue & Customs (HMRC) had variations in its sights as part of its clamp-down on tax avoidance. The chancellor announced that deeds of variation would be ‘looked at’. HMRC called for evidence as to the use of deeds of variation, to decide whether it was necessary to clamp down on their use if they were being used for tax avoidance purposes.

The outcome of the consultation confirmed what practitioners in this area always knew: that variations (so far as they are used for tax purposes at all) are tax mitigation of the most unobjectionable form, that simply allow beneficiaries to put in place arrangements that the deceased would have been able to put in place had they kept their will up to date. HMRC decided to leave variations and their tax consequences untouched.

This article concerns the tax effects of deeds of variation and their options for use in ensuring that a family’s wealth is dealt with in the most efficient manner.

What is an instrument of variation?

A deed of variation (in fact, it need not be a deed, although it usually is) does what it says: it varies the disposition of the estate. In essence, rather than assets passing to the original beneficiary named in the will or specified under the rules of intestacy, the assets are diverted to a different party. Provided a beneficiary is of full age and has capacity, they can vary the destination of a gift to themselves and provide that it should pass to someone else.

Provided certain conditions are fulfilled, the dispositions contained in a variation can be treated for tax purposes as if they were made by the deceased – essentially, the provision of the deed can be read back into the will. This means that a variation may have the effect of reducing inheritance tax (IHT) payable on an estate (if assets are diverted away from a non-exempt beneficiary to an exempt beneficiary, such as the deceased’s spouse or a charity) or allowing assets to pass from one beneficiary to another without affecting the original beneficiary’s tax position. The tax effects of a variation are discussed below.

It is important to remember that the dispositions in a variation are treated as having been made by the deceased for tax purposes only, and only then for the purposes of the tax for which an election has been made. In reality, the assets are transferred by the original beneficiary to the new beneficiary. This is particularly important if a will sets up a protective trust which the principal beneficiary wishes to vary. If the principal beneficiary of a protective trust purports to vary the will so as to accelerate the interest of the beneficiaries who will take the property on the death of the principal beneficiary (remaindermen), this will trigger a forfeiture of their interest, and a discretionary trust will arise, even if they intend the variation to be read back into the will. This means that the variation will need the approval of the court under the Variation of Trusts Act 1958 (VTA 1958).

As the variation is (in reality) being made by the original beneficiary, all of those affected by the proposed variation must consent. If children or unborn or unascertained beneficiaries are affected in the sense that assets will be diverted away from them, consent must be given on behalf of those persons by the court under the VTA 1958.

If a gift to a party is not affected by the proposed variation, they need not be a party to the variation. Therefore, if a will leaves a gift of £100,000 each to three people, one person can vary the destination of their gift, without needing to involve the other beneficiaries.

Tax effects

Tax mitigation is not the only reason to vary the disposition of an estate, but the taxation of an estate is obviously a factor, and will influence the way in which a variation may be structured.

A variation may be treated as having been made by the deceased (or ‘read back’) for IHT purposes under section 142 of the Inheritance Tax Act 1984 (IHTA 1984). There is a similar provision for capital gains tax (CGT) purposes under section 62(6) of the Taxation of Chargeable Gains Act 1992 (TCGA 1992). However, not every variation will be read back into the will. If the parties want those statutory provisions to apply, so that the dispositions are treated as having been made by the deceased, they must make an election. If they do not, the special tax consequences will not apply, and the original beneficiary will be treated as making the disposal.

For IHT purposes, the will is read as if it contained the provisions in the variation. This means that if the will is varied to divert a gift from a non-exempt beneficiary to an exempt beneficiary (such as a spouse or charity), the IHT bill on the estate will be reduced.

There can also be advantages in making an election even if there is no immediate impact on the IHT payable on the estate. The difference between making an IHT election or not, where there is no immediate impact on IHT in the estate, can be best illustrated by an example.

A receives a gift of £400,000 under a will. He wishes to pass the gift to his son, B. Both A and B are non-exempt beneficiaries so far as the deceased is concerned, so that there is no change to the IHT bill payable as a result of the deceased’s death. If A were to vary the will without making an election under section 142 of the IHTA 1984 for the gift to be read back, A would make a transfer of value to B of £400,000. If A were to die within seven years, there would be IHT payable on that gift of up to £30,000 (as the amount of the gift exceeds the nil-rate band (NRB), which is currently £325,000) and there would be no NRB available to set against A’s estate on his death, so the whole of his estate would be liable to IHT at 40 per cent. If, however, A had elected for the variation to be read back into the will, there would be no tax payable in respect of the gift on A’s death whenever he dies and, provided A had made no other gifts in the seven years prior to his death, there would be a full NRB available to set against his estate.

If an election is made for CGT purposes, the disposal is treated as having been made by the deceased, and the original beneficiary is not treated as having made a disposal. Therefore, if the asset has increased in value since death, the gain will not reduce the original beneficiary’s available annual exempt amount.

Conditions for reading back

The beneficial tax effects of a deed of variation are only available if the following certain conditions are fulfilled.

The variation must be made within two years of the deceased’s death. This is an absolute time limit and cannot be extended. The date of the grant of probate or letters of administration is irrelevant for these purposes. A deed can be made before a grant.

The deed must contain an election that the provisions of section 142 of the IHTA 1984 and/or section 62(6) of the TCGA 1992 will apply.

The deed must not be made for valuable consideration. However, if a beneficiary is receiving something else from the same estate in return (eg if the beneficiaries swap gifts with each other), this does not count as valuable consideration. HMRC also accepts that settlement of a potential claim under the Inheritance (Provision for Family and Dependants) Act 1975 by deed of variation can be read back under section 142 of the IHTA 1984.

The variation must have effect in the real world. A variation which purports to termi nate a life interest after the death of the life tenant is ineffective.

There cannot be multiple variations of the same property.

The disposition of the estate must be varied. A provision which simply inserts administrative provisions in the will will not be read back under section 142.

To elect or not to elect?

The parties may choose to vary the dispositions of a will without choosing to have the variation read back for tax purposes. The parties may choose to make an election for only IHT, or for only CGT, or for both taxes. In deciding whether to make a CGT election, consider whether the beneficiary has already made gains in that year. If they have, an election should be made. If they have not, and the gain is within the annual exempt amount, it may be advantageous to not make the election, so that the new beneficiary has a higher base cost. In the case of IHT, an election should usually be made unless the original beneficiary was exempt and the new beneficiary is not, so that the tax on the estate would be increased as a result of the variation.

Common uses of deeds of variation

Deeds of variation are often used to improve the tax efficiency of an estate, and to put in place the planning which would have been in place had the deceased made a will immediately before their death.

Farmers and small business owners

Agricultural and business property attracts relief from IHT at either 50 per cent or 100 per cent. If relievable property is given to an exempt beneficiary such as a spouse, or forms part of residue which is divided between an exempt and non-exempt beneficiary, some of this relief will be wasted and an opportunity to pass more value to the next generation without tax will have been missed. This can be remedied by a deed of variation making a specific gift of relievable property to a non-exempt beneficiary, and subject to tax so that relief is not wasted.

Spouses and civil partners

In 2007, the transferrable nil-rate band (TNRB) was introduced, allowing a spouse to transfer any unused NRB to his widow. Prior to the introduction of the TNRB, a gift of the entire estate to the surviving spouse would result in the NRB being wasted. Deeds of variation were frequently entered into to insert an NRB discretionary trust to avoid this. Now, in order to make full use of the TNRB, parties may wish to remove gifts to children and make a gift to the surviving spouse. The insertion of NRB discretionary trusts is no longer necessary, although given that the NRB has remained static for a number of years, it may be beneficial to create such a trust to hold assets which will increase significantly in value.

In addition, where a person has survived more than one spouse, they may have more than one NRB which could be transferred to them, but there is a limit on the amount of the uplift in the NRB, to 100 per cent. For example, if A is widowed and has 100 per cent uplift available from her first husband, and subsequently marries B, B’s NRB will be wasted if he leaves all of his assets to A, because she is already entitled to 100 per cent uplift in her NRB. In those circumstances, the insertion of a non-exempt gift by deed of variation will allow the maximum possible amount to be passed to non-exempt beneficiaries without tax being payable.

Generation skipping

Deeds of variation can be used for wealth planning in the wider family. The original beneficiary may not need funds given to them by the will, which will only serve to increase their own estate for IHT purposes. A deed of variation provides an IHT-neutral way in which assets can be passed to the next generation without any adverse impact on IHT payable in the estate of either the deceased or the original beneficiary. The deed of variation could make an absolute gift to the next generation.

Alternatively, a trust in favour of the next generation could be inserted into the will. There would be no immediate charge to IHT as there would be if there is a lifetime gift into trust, provided the election is made, as tax would already have been paid on the assets at the death rate. Furthermore, if a discretionary trust were to be set up by the deed of variation, the original beneficiary could be a beneficiary without those assets forming part of their estate for IHT purposes, and without there being any reservation of benefit by which the assets would be deemed to form part of their estate.

Residential NRB

When the residential NRB is introduced from 6 April 2017, a variation may be necessary to ensure that the residence passes to a surviving spouse (so that they can take advantage of the transfer of the residential NRB) or to a direct descendant, such as a child.

Change in circumstances

Deeds of variation may be motivated by non-tax considerations. A deed may be useful where, for example, a further grandchild has been born between the date of the will and the date of death, and the parties agree that the child should benefit from the estate without any adverse tax consequences.


Deeds of variation can remedy a lack of planning, or planning disrupted by a change of circumstances. It can also help mitigate tax in the wider family. They are a useful tool for any private client practitioner. Deeds of variation have now been rehabilitated, and are no longer subject to attack from HMRC. They should not be overlooked in dealing with an estate.