While Deeds of Variation can offer numerous benefits, it is crucial to consider potential risks and drawbacks before proceeding:
Inheritance Tax (IHT) Implications: If a beneficiary who has redirected their inheritance via a Deed of Variation dies within seven years of making the Deed, their estate may face additional IHT liabilities. This is because their estate would include the assets they redirected.
Irrevocability: A Deed of Variation is irrevocable once signed. Therefore, it is of utmost importance that all parties fully understand the implications of the Deed and are certain about their decisions before signing.
Family Disputes: If not all beneficiaries are in agreement with the proposed changes, a Deed of Variation can potentially lead to family disputes or conflicts.
Complexity and Legal Ambiguity: The rules around Deeds of Variation, particularly in relation to tax implications, can be complex and unclear. It can be easy to inadvertently overlook a requirement or misunderstanding a rule, leading to unintended consequences.
Role of Professional Advice
Given the complexity of the laws and regulations governing Deeds of Variation, as well as the significant consequences of getting things wrong, it is highly advisable to seek professional advice before proceeding. Whilst online templates for Deeds of Assignment can be easily accessed, a legal professional or an estate planner can help in accurately interpreting the rules, drafting the Deed, and guiding beneficiaries through the process.
Moreover, a tax professional can provide valuable guidance on the tax implications of a Deed of Variation, particularly regarding IHT and CGT. Effective tax planning can help optimise the benefits of a Deed of Variation and prevent unforeseen tax liabilities.
A Deed of Variation can serve as a powerful tool for estate planning in the UK. It offers beneficiaries a degree of flexibility in redistributing their inheritance in a way that better suits their current circumstances or wishes. It can also help in optimising the tax efficiency of an estate, thereby preserving wealth for future generations.
However, it should be approached with caution and thorough understanding, given the potential pitfalls and the stringent legal requirements associated with it. Professional advice is recommended to ensure the Deed of Variation is correctly prepared, and that all legal and tax implications are fully understood. With the right approach and advice, a Deed of Variation can be a beneficial tool in managing and distributing an estate according to the beneficiaries’ wishes, while potentially reducing the tax burden.