Introduction

I recently received a query from a practicing solicitor asking for advice on using Deeds of Variation. The solicitor in question was acting on behalf of clients who wished to alter the terms of their father's Will to afford a fairer disposition of the assets amongst family members. Ordinarily this would one of the situations where a Deed of Variation could be employed. However, the testator's death was 6 years ago.

The query was despite the lapse in time, could a Deed of Variation still be used without asking for it to be applied retrospectively for the purposes of inheritance tax and capital gains tax?

The Purpose of the 2 Year Rule

To recap from my previous article, in order to be valid a Deed of Variation must comply with 3 conditions;

Must be made in writing.

All persons who were original beneficiaries in the Will and any persons who benefit from the proposed variations in the Deed must sign the Deed.

It cannot be given for money or money's worth.

It must be made within 2 years of the death of the decedent.

One of the most crucial uses for a Deed of Variation is to affect the tax liability on an estate. Therefore, for a Deed to be valid it must be made within 2 years of the death of the testator in order to be applied retrospectively for Capital Gains Tax and Inheritance Tax. If a Deed of Variation fails to comply with this - or any of the other conditions - it ceases to have retrospective affect for tax purposes, and amounts to nothing more than a transfer of value - namely, a gift.

Having liased with the Inland Revenue on this subject, it is clear that Deeds of Variation are only to be used within the 2 year period as, to quote an Inland Revenue adviser "there would be no point in using such instruments after that time as it would afford no tax saving benefit".

Changing the Will after the 2 Year Period

So, what do you do if you wanted to change the terms of a Will after the 2 year period? As stated above, where a Deed of Variation does not comply with the 2 year rule, any dispositions which the beneficiaries seek to make via the Deed amount to nothing more that simple transfers of value, gifts. Thus, the approach to adopt would be to make Potentially Exempt Transfers of the assets which the beneficiaries seek to redistribute.

This is as simple as handing over the gift, or saying 'I give up my interest and gift it to you'. It is always advisable however, particularly where substantial interests in property are involved, to write a memorandum of the potentially exempt transfer. Such a memorandum should include the name of the person giving the gift, to whom the gift is given and the date.

JsByrne
LLB (Hons) LPc.
www.Draft-Your-Will.com