Deeds of Variation: A Smart Way to Reduce Inheritance Tax After You Inherit

A deed of variation allows the original beneficiaries of an estate to change how their inheritance is distributed after death. If made within two years, it is treated for tax purposes as if the deceased had made the redirected gift themselves for IHT purposes and Capital Gains Tax (CGT) purposes.  The specific provision is contained in Section 142 IHTA 1984.

This means you can redirect assets without creating a gift (and having to survive 7 years) and the new beneficiaries will acquire the inheritance directly from the estate at date of death value.

One of the most effective strategies is to vary part of an inheritance into a trust rather than taking it personally.

Commonly, a discretionary trust is used to keep assets outside your estate but allows you to retain both control (by becoming a trustee) and access to the trust funds (by being a potential beneficiary).  This can be a great way to keep a “rainy day” fund!

The trust is funded as if the assets passed directly from the deceased, often up to the value of the nil‑rate band (currently £325,000).

Example

Mr Myerson inherits £400,000 but doesn’t need it. By redirecting £300,000 into a trust within two years the following happens:

• Mr Myerson’s own estate is reduced by £300,000;
• the assets are protected for Mr Myerson’s children or grandchildren or any of his chosen beneficiaries;
• Mr Myerson remains a potential beneficiary of the trust in case he needs funds; and
• A potential £120,000 IHT liability is mitigated in Mr Myerson’s estate.