Many wills are executed but subsequently are not updated; as a consequence, on death, the terms of the will may be unsatisfactory for various reasons (e.g. adverse tax consequences due to tax changes; named beneficiaries have died; new grandchildren etc.). In such situations some amelioration of problems arising may be possible by the use of a so-called “deed of variation” (DoV).
A DoV is simply a mechanism by which the original beneficiary named in the will redirects their inheritance to someone else (even if that someone else is not named in the will) without adverse inheritance or capital gains tax consequences.
Barry Smith died and in his will he left £250,000 cash to each of his two adult children, Mary and Melinda; £100,000 to his mother, Susan, and everything else to his wife, Barbara.
Barry’s will had been made many years ago when Susan was not particularly well-off but since then she has inherited a significant sum from a friend who she had looked after and thus did not really need the £100,000 gift. Susan is aged 88 and if she simply gave the £100,000 to, say, Mary this would be a potentially exempt transfer (PET) for inheritance tax purposes and should Susan die within the next 7 years Mary would be faced with a potential £40,000 inheritance tax bill.
However, if Susan executes a DoV (under which she redirects the £100,000 to Mary) this is not treated as a PET by Susan but as if Barry’s will had left the £100,000 to Mary directly. Should Susan die within the next 7 years Mary will not be faced with any inheritance tax charge.
Tom died and in his will left his holiday home to two (Sarah and Louise) of his three children, having fallen out with (Ben, his son) many years earlier. The holiday home was worth £300,000.
Sarah and Louise are not very happy with their dad’s will in this regard and would like Ben to have one third of the home.
Sarah and Louise could each execute a deed of variation redirecting 16.7% of their respective 50% inherited share to Ben; each would then own 33%.
As in Example 1 above, no adverse inheritance tax (or capital gains tax) consequences arise whilst at the same time allowing Sarah and Louise to effectively override their dad’s wishes expressed in his will.
Three points, however, need to be noted: first, the DoV needs to be in writing; second, the DoV needs to be executed within 2 years of the date of death, and thirdly, any beneficiaries’ interests adversely affect by a DoV must agree to its execution.
Failure to Update a Will
A DoV cannot, however, put right all problems which may arise due to a failure to keep a will up to date.
Consider the following example:
Pamela Problem, a widow, executed her will many years ago. In it she left her elder brother, Harry, £70,000; her younger sister, Eileen, £50,000; her close friend, Helen, £25,000; and everything else (approximately £5,000) to her favourite charity, “Cats in Need of Help”. However, Harry, died just a few weeks before Pamela and Pamela’s will made no provision for what should happen in such circumstances.
As a consequence, the “Cats in Need of Help” charity not only received their original inheritance of £5,000 but also Harry’s £70,000, a result Pamela may not (had she known) have wanted to happen.
A DoV cannot unfortunately help in such a situation; almost certainly the charity would not be amenable to redirecting the £70,000 to, say, Eileen and/or Helen either in whole or in part.
The solution was for Pamela to have made a substitutional gift such that should Harry die before her, his £70,000 would instead go to, say, Eileen.
Keep any will under constant review and, following death, remember a DoV may come in handy.