What is a Deed of Variation?
A Deed of Variation is a legal document that allows a beneficiary under a will or an intestacy to redirect their inheritance to another person. This can include redirecting the gift to someone who was not originally a beneficiary of the estate. Provided the redirection is executed within two years of the deceased’s death and statutory requirements are complied with, it is not treated as a taxable gift for inheritance tax (IHT) or capital gains tax (CGT) purposes.
Examples
Example 1: Sharing Inheritance
Sarah is named as the sole beneficiary in her uncle’s will. However, she decides to share her inheritance with her brother, John. By executing a Deed of Variation within two years of her uncle’s death, Sarah can legally transfer a portion of her inheritance to John without adverse tax implications.
Example 2: Charitable Donation
James inherits a significant sum from his late aunt’s estate. He wants to donate part of his inheritance to a charity. By using a Deed of Variation, James can redirect the desired amount to the charity within the allowed timeframe, ensuring that the charitable donation does not incur IHT or CGT liabilities.
Example 3: Estate Equalization
Claire receives an inheritance from her father, but she believes it would be fairer if her other siblings received a portion as well. Utilizing a Deed of Variation, she can redistribute her inheritance among her siblings, provided all actions are taken within the specified two-year period.
Frequently Asked Questions
1. What are the primary benefits of using a Deed of Variation?
- Tax Efficiency: Alters the distribution of an estate without invoking additional inheritance tax or capital gains tax.
- Flexibility: Provides a means to address perceived unfairness in the will’s distribution.
- Beneficiary Preference: Accommodates wishes of beneficiaries who want to benefit others.
- Timeframe: Must be executed within two years of the deceased’s death.
- Agreement: All affected parties must agree to the variation.
- Compliance: Compliance with statutory requirements to ensure validity and tax neutrality.
3. Can a Deed of Variation be used to avoid creditors?
No, a Deed of Variation cannot be used to defraud creditors or avoid legitimate debts of the deceased’s estate.
4. Who needs to sign the Deed of Variation?
All affected beneficiaries and the personal representatives of the estate must agree and sign the document.
5. How is a Deed of Variation different from a disclaimer?
A disclaimer allows a beneficiary to refuse a gift without redirecting it to someone else, whereas a Deed of Variation enables the redirection of the gift.
Will
A legally binding document that sets forth the wishes of an individual regarding the distribution of their estate after death.
Beneficiary
A person named in a will or trust to receive an inheritance or benefit.
Intestacy
The condition of an estate of a person who dies without a legally valid will, leading to distribution according to statutory rules.
Inheritance Tax (IHT)
A tax on the estate of someone who has passed away, imposed by the government.
Capital Gains Tax (CGT)
A tax on the profit realized from the sale of non-inventory assets.
Online Resources
- HMRC - Inheritance Tax
- Citizens Advice - Changing a Will After Death
- Gov.uk - Variation of Wills
Suggested Books for Further Studies
- “Make Your Own Living Trust” by Denis Clifford
- “Estate Planning For Dummies” by N. Brian Caverly and Jordan S. Simon
- “The Complete Book of Wills, Estates & Trusts” by Alexander A. Bove Jr. Esq.
Accounting Basics: “Deed of Variation” Fundamentals Quiz
### Can a Deed of Variation be used to redirect an inheritance more than two years after the deceased's death?
- [ ] Yes, it can be used at any time.
- [x] No, it must be done within two years.
- [ ] Only within three years.
- [ ] Only within five years.
> **Explanation:** A Deed of Variation must be executed within two years of the deceased's death to ensure that it is not treated as a gift for inheritance tax or capital gains tax purposes.
### Does a Deed of Variation need the agreement of all beneficiaries?
- [x] Yes, all affected beneficiaries must agree.
- [ ] No, only one beneficiary's approval is needed.
- [ ] Only the executor's approval is required.
- [ ] It requires a court's approval.
> **Explanation:** For a Deed of Variation to be valid, all affected beneficiaries and the personal representatives must agree to the variation.
### What is the primary tax benefit of using a Deed of Variation?
- [ ] It reduces the income tax liability.
- [x] It avoids inheritance tax and capital gains tax.
- [ ] It eliminates all types of taxes.
- [ ] It increases the value of the estate.
> **Explanation:** The primary tax benefit of using a Deed of Variation is to avoid inheritance tax and capital gains tax, provided the variation is done within the required timeframe.
### Can a beneficiary use a Deed of Variation to transfer their inheritance to a charity?
- [x] Yes, they can redirect it to a charity.
- [ ] No, it can only be transferred to another individual.
- [ ] Only if the charity was originally listed in the will.
- [ ] Charities are not eligible for such transfers.
> **Explanation:** A beneficiary can use a Deed of Variation to transfer their inheritance to a charity, facilitating charitable donations without incurring IHT or CGT.
### Is a Deed of Variation legally enforceable if all statutory requirements are not met?
- [ ] Yes, it is always enforceable.
- [x] No, it must meet all statutory requirements.
- [ ] It depends on local laws.
- [ ] Only if notarized.
> **Explanation:** A Deed of Variation is not legally enforceable unless all statutory requirements are met, including the two-year timeframe and agreement of all affected parties.
### Can a Deed of Variation alter the will to include a new beneficiary?
- [x] Yes, it can redirect inheritance to any person.
- [ ] No, new beneficiaries cannot be added.
- [ ] Only existing beneficiaries can receive redirection.
- [ ] The executor must appoint the new beneficiary.
> **Explanation:** A Deed of Variation allows the beneficiary to redirect their inheritance to any person, regardless of whether they were originally named in the will.
### Who needs to sign the Deed of Variation?
- [ ] Only the executor.
- [ ] Just the main beneficiary.
- [x] All affected beneficiaries and personal representatives.
- [ ] Only the attorney of the estate.
> **Explanation:** All affected beneficiaries and the personal representatives of the estate must sign the Deed of Variation to make it valid.
### Does a Deed of Variation avoid all forms of RIFT (Rapid Inheritance Tax Framework)?
- [ ] Yes, it avoids all.
- [ ] No, it doesn’t affect RIFT.
- [x] Yes, if executed correctly, it can avoid RIFT.
- [ ] Only judicial approval can avoid RIFT.
> **Explanation:** Properly executed Deeds of Variation can help avoid Rapid Inheritance Tax Framework implications, thus reducing the potential tax burden.
### What is the difference between a disclaimer and a Deed of Variation?
- [ ] A disclaimer redirects the gift to another benefactor.
- [ ] A disclaimer involves changing the value of the inheritance.
- [x] A disclaimer involves refusing a gift, while a Deed of Variation redirects it.
- [ ] Both terms are synonymous.
> **Explanation:** A disclaimer involves refusing an inheritance, while a Deed of Variation involves redirecting an inheritance to another person.
### Can creditors challenge a Deed of Variation?
- [x] Yes, it cannot defraud creditors.
- [ ] No, once done it is final.
- [ ] Only if approved by the court.
- [ ] Only within the first year.
> **Explanation:** A Deed of Variation cannot be used to defraud creditors, and they may challenge it if it appears to be executed with fraudulent intentions.
Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!
