Changing the distribution of an estate
After someone dies, their affairs need to be wound up and everything they own (ie their estate) distributed to those entitled to inherit (known as the ‘beneficiaries’). Where the deceased left a Will, this will be done in accordance with their will. Where the deceased died without a will, their estate will be distributed according to the rules of intestacy.
There may be circumstances after death, in which a beneficiary under a will (or an individual entitled to inherit under the rules of intestacy) wants to change the way the estate is distributed. This results in the distribution of the estate no longer aligning with the terms of the will (or the rules of intestacy).
Why may a will be varied?
There are multiple reasons why someone may want to change the distribution of an estate under a will or the rules of intestacy. These reasons include, but are not limited to:
making the distributions equal between all beneficiaries
providing an inheritance for someone who was not included in the will (eg a grandchild who had not been born when the will was made)
providing an inheritance for someone who is not covered by the rules of intestacy (eg an unmarried partner or a step-child)
tidying up and clarifying certain aspects of the will
moving the deceased’s assets into a trust
reducing the amount of capital gains tax payable on the estate
How is a will changed?
Where beneficiaries of the estate want to change or redirect their inheritance entitlement, they need to make a ‘variation’ in writing. While a formal document does not need to be used, certain stringent requirements need to be met. As a result, most people use a document called a Deed of variation to vary an inheritance. While there is typically no need to vary a will using a deed, it is good practice to do so as this will ensure that the variation is enforceable. The beneficiary can use this document to redirect their share to anyone they wish, regardless of whether or not that person inherited under the will or the rules of intestacy.
All beneficiaries that are detrimentally affected by the change will need to agree to it. Where the variation would affect a beneficiary who is under 18 it is not possible to vary the will, as a minor cannot legally agree to a deed of variation.
A will may leave the entire estate to be divided equally between the deceased’s 3 children (Harry, Sam and Paula), but at the time of death, the deceased had 4 children (Harry, Sam, Paula and Hannah). The children may decide to divide the entire estate equally between all of them, rather than between the 3 as set out in the will. To do this, Harry, Sam and Paula (ie the children named in the will) must all agree, as the change will affect how much each will inherit.
If only 2 of the 3 children agree, they can only alter the share of the estate they are entitled to (ie ⅔ of the entire estate). The children will need to complete a deed of variation to change their entitlement to the inheritance.
As a result, if the entire estate that is to be distributed is worth £200,000 and Harry, Sam and Paula all agree to vary the will, then each of the children will be entitled to £50,000. If only Harry and Sam agree, then Paula (the child that didn’t agree) will receive £66,666 (ie ⅓ of the entire estate), while Harry and Sam (the children that did agree to the variation) and Hannah (the new beneficiary) will each receive £44,444 (ie ⅓ each of the remaining ⅔ of the entire estate).
What changes can be made using a deed of variation?
You can use a deed of variation to:
redirect specific assets you inherited to different people
give away your entire inheritance entitlement
set up a trust
The deed of variation must clearly set out what inheritance entitlement is being changed and how it is being changed. For example:
if a specific asset (eg a house) is being passed to someone else
if a gift of money is being divided between the beneficiary entitled to it and someone else
if a gift of money is being given entirely to someone else
if a share in the remainder of the estate (ie what is left of the estate after all other gifts have been made and any debts and inheritance tax has been paid) is being given to someone else
For more information on the types of gifts under a will, read Elements of a will.
Where a will is being changed using a deed of variation, any changes made will be treated as if the deceased had made them in their original will.
What changes cannot be made?
When must a deed of variation be made?
A deed of variation must generally be made within 2 years of the deceased's death, in order to ensure that a variation is retrospective to the date of death for inheritance tax and capital gains tax purposes. After 2 years, a transfer made by a beneficiary under a deed of variation will be treated as a transfer by the beneficiary, rather than as a gift made by the deceased on their death.
A deed of variation can be made before or after the grant of probate (ie the right to administer the deceased’s estate) has been obtained. A deed of variation can be made before or after the inheritance in question has been formally transferred to the beneficiary. Where the inheritance was an asset and was sold before the variation was made, the proceeds of sale can be transferred to the new beneficiary.
Can a deed of variation be used to help minimise inheritance tax?
A deed of variation can be used as an effective way of reducing liability for both inheritance tax and capital gains tax. You can use a deed of variation to adjust the distribution of an estate to make it more tax-efficient by, for example:
donating to charity
making the best use of available reliefs and exemptions
spreading large inheritance amounts out more evenly between beneficiaries
passing your inheritance directly to your children so that they receive the full benefit
While using a deed of variation does not mean you avoid tax liability, it serves as a way to take advantage of tax reliefs to maximise on the estate.
It is important to note that where you wish to vary your tax liability, you should seek specialist advice from a tax advisor or inheritance lawyer. Ask a lawyer for more information.
Does HMRC need to be informed when a will is varied?
Whether or not HMRC needs to be informed of any changes made to a will using a deed of variation depends on the amount of inheritance tax payable after the variation.
If the changes result in more inheritance tax being payable, HMRC must be informed. The executors of the last will and testament will need to send a copy of the deed of variation to HMRC within 6 months of it being made so that the estate can be taxed correctly.
If the changes don’t change the amount of inheritance tax payable, a copy of the deed of variation does not need to be sent to HMRC.