Deeds of Variation and Disclaimers Explained

When someone dies, their Will usually determines who inherits their property, money and possessions. If there is no Will, the intestacy rules decide who receives the estate.

But what happens if the beneficiaries would prefer a different arrangement?

Perhaps a parent has left everything to an adult child who is already financially secure. The child would rather the inheritance passed directly to their own children. Alternatively, someone may have been left money they simply do not wish to accept.

Many people are surprised to learn that, in certain circumstances, an inheritance can be redirected or declined after death.

Two legal mechanisms can make this possible: a deed of variation and a disclaimer.

What is a Deed of Variation?

A deed of variation allows someone who is entitled to inherit to redirect some or all of their inheritance to another person or, in appropriate circumstances, a trust.

For example, imagine a father dies leaving £200,000 to his daughter.

The daughter is financially comfortable and would prefer the money to benefit her two children instead. Rather than inherit the money herself and subsequently give it away, she may be able to execute a deed of variation redirecting £100,000 to each child.

Provided the necessary legal and tax conditions are satisfied, the arrangement can be treated for inheritance tax and capital gains tax purposes as though the father had left the money directly to his grandchildren.

This can be particularly useful where passing assets through one generation unnecessarily increases the value of that generation’s estate.

Why Might Someone Want to Change an Inheritance?

There are several reasons.

Providing for someone overlooked in a Will

A deceased person may have made their Will many years earlier, before the birth of a grandchild or a change in family circumstances. The beneficiaries may agree that someone else should receive part of the estate.

Passing an inheritance to the next generation

An adult beneficiary who does not need the money may prefer children or grandchildren to benefit directly.

Reducing potential inheritance tax liabilities

A properly structured variation can sometimes produce inheritance tax advantages, particularly where assets would otherwise pass into an already substantial estate.

Making better provision for a surviving family member

Beneficiaries may agree to redirect part of their inheritance to a surviving spouse, partner or another family member who requires greater financial support.

Creating a trust

In suitable circumstances, inherited assets can be redirected into a trust, although the tax consequences and ongoing responsibilities need careful consideration.

What is a Disclaimer?

A disclaimer is different.

Instead of redirecting an inheritance to a chosen person, the beneficiary formally refuses to accept it.

For example, a son may be left £50,000 under his mother’s Will but decide that he does not wish to inherit it.

He may be able to disclaim the gift.

The important distinction is that he cannot use the disclaimer to decide who receives the money instead. Its destination is determined by the remaining provisions of the Will or the applicable intestacy rules.

A disclaimer must be considered carefully because a beneficiary who has already accepted a gift may no longer be able to disclaim it. Generally, the whole of the particular entitlement must be refused.

Where a beneficiary wishes to choose who receives an inheritance instead, a deed of variation will usually be the more appropriate mechanism.

The Important Two-Year Rule

Timing is crucial.

For a variation or disclaimer to qualify for the special retrospective inheritance tax and capital gains tax treatment, the relevant written instrument must ordinarily be completed within two years of the deceased person’s death.

For a deed of variation, the document must also contain the necessary statutory statements where the parties intend that tax treatment to apply.

The effect is that, for the relevant tax purposes, the inheritance can be treated as though the deceased had originally made the revised arrangement.

This does not mean that every deed of variation produces a tax saving. The outcome depends on the circumstances of the estate, the beneficiaries and the assets involved.

Nor does the special tax treatment mean that the deceased’s Will has literally been rewritten for every legal purpose.

Does Everyone Have to Agree?

Not necessarily.

A beneficiary can generally redirect their own inheritance without requiring every other beneficiary to agree.

However, where a proposed variation would reduce another person’s entitlement, that person’s agreement will be needed.

Particular care is required where children, vulnerable beneficiaries, trusts or disputed estates are involved.

Can a Deed of Variation Protect Assets from Care Fees?

This is an important area of misunderstanding.

A deed of variation is not a guaranteed way to protect an inheritance from future care fees, creditors or means-tested benefit assessments.

Although qualifying variations can receive retrospective treatment for certain tax purposes, that does not automatically apply to other areas of law.

A decision to give up an inheritance may still be examined under rules concerning the deliberate deprivation of assets.

Anyone considering a variation for these reasons should obtain advice before proceeding.

How Can Do It Legally Help?

At Do It Legally, we help individuals and families understand their options when making Wills, planning for inheritance and dealing with legal documents following a death.

If you have inherited money or property but would prefer it to pass to someone else, or you are considering refusing an inheritance, we can discuss your circumstances and the documentation that may be appropriate.

We can assist with straightforward deeds of variation and disclaimers, subject to reviewing the estate and identifying any issues requiring specialist tax or regulated legal advice.

An inheritance does not always have to pass exactly as originally anticipated — but making changes correctly, and at the right time, matters.

For an initial enquiry, contact:

Do It Legally
Brighton & Hove | Services available nationally
Telephone: 01273 011245
Website: www.doitlegally.co.uk

This article provides general information about the law in England and Wales and does not constitute advice on any particular estate or tax position.