Any changes that occur as a result of a Deed of Variation are treated as having been made by the deceased, not the beneficiary (the one that gave up his/her entitlement to benefit). This means that the rules that apply to lifetime PETs (Potentially Exempt Transfers) are not applicable and the beneficiary does not have to abide by the seven year period to avoid Inheritance Tax being liable on their own estate.
The same goes with rules regarding gifts with reservation (meaning a gift that you give away but do not continue to benefit from). As the deceased is already dead and therefore cannot benefit from the gift.
A Deed of Variation can be used to reduce the IHT payable on the estate of the deceased (e.g. if the re-directed gift goes to a surviving spouse, charity or political party etc.). IHT may potentially increase if the gift is being redirected from the spouse to a child.
Capital Gains Tax implications
As long as the asset redirected by a Deed of Variation is made within two years of the death, and the declaration is made within the Deed, then the asset is not a disposal for CGT (Capital Gains Tax).
The redirected asset is deemed to have been gifted to the new beneficiary as if he were the original beneficiary, at the market value at the time of death as capital gains are re-evaluated on death without any liability to CGT. However IHT may still be applicable.
Income Tax implications
Any income received by the original beneficiary, up to the date of the Deed of Variation, will be taxed as their income.
After the date of the Deed of Variation, the income is transferred to the new beneficiary, this includes any income that arises before the date of the Deed but has not been paid to the original beneficiary.
In general, a Deed of Variation is an important tool for anyone planning for their future. Be advised that while it is a relatively painless way to save on tax, it is not a bulletproof method and the laws relating to Deeds of Variation can be withdrawn at any point as a quick way to increase tax intake by the government.
Costs and fees
For straightforward Deeds of Variation, be prepared to pay around £350 + VAT to reputable probate companies or solicitors. The fee does not normally include any conveyancing or creation of trusts.
Provided that all the beneficiaries affected by the Deed are in agreement and they are all over 18, the Deed of Variation can be completed and posted to you within days.