Inheritance tax.

Deed of variation

Inheritance Tax can become payable when someone dies, and the value of their estate exceeds the available tax-free allowances. Rising property values, investments and other assets mean that estates which may not appear exceptionally wealthy can still face an Inheritance Tax liability.

There are legitimate ways to organise an estate and, in suitable cases, reduce the amount of tax payable. One option available after a person has died is a deed of Variation, which allows a beneficiary to redirect some or all of their inheritance.

What Is Inheritance Tax?

Inheritance Tax is normally charged at 40% on the taxable part of an estate above the available allowances.

The standard Inheritance Tax threshold, known as the nil-rate band, is £325,000. This allowance is available against qualifying assets in an estate.

An additional residence nil-rate band of up to £175,000 may also be available where a qualifying home is left to direct descendants, such as children or grandchildren.

The residence nil-rate band is reduced where the net estate exceeds £2 million. It is tapered by £1 for every £2 by which the estate exceeds that figure.

Can a Couple Leave £1 Million Tax-Free?

Transfers between spouses and civil partners are usually exempt from Inheritance Tax. Any unused proportion of the first spouse or civil partner's nil-rate band can normally be transferred for use when the survivor dies.

The same principle can apply to the residence nil-rate band. As a result, the estate of a surviving spouse or civil partner may potentially benefit from:

■ Two standard nil-rate bands, totalling up to £650,000
■ Two residence nil-rate bands, totalling up to £350,000

This can produce a combined maximum allowance of £1 million. However, it is not a general £1 million exemption. The full amount will only be available where the relevant conditions are met, the allowances were not previously used, and the estate is not affected by the residence nil-rate band taper.

What Is a Deed of Variation?

A deed of Variation allows a beneficiary to redirect property or money they inherited under a will or the intestacy rules.

Despite its name, a formal deed is not always required. The Variation must be recorded in writing and meet the relevant legal and tax requirements.

The beneficiary can redirect all or part of their inheritance to another person, a trust or a charity. The person whose entitlement is being reduced must agree to the change.

A deed of Variation does not rewrite the deceased's will for every purpose. It changes how particular assets or gifts pass following the death.

The Two-Year Time Limit

To receive the intended Inheritance Tax and Capital Gains Tax treatment, a deed of Variation must normally be completed within two years of the date of death.

The document must clearly identify the original inheritance and explain how it is being redirected. It must also contain the appropriate tax statement where the parties want the Variation to be treated as having been made by the deceased for tax purposes.

HMRC cannot normally extend the two-year deadline simply because the beneficiaries were unaware of the rules or delayed obtaining advice.

How Can a Deed of Variation Reduce Inheritance Tax?

A deed of Variation does not automatically reduce the Inheritance Tax due on the estate. Its effect will depend on where the inheritance is redirected and the tax circumstances of those involved.

It may be useful where:

■ A beneficiary redirects assets to a spouse or civil partner who benefits from an exemption
■ An inheritance is redirected to charity
■ Assets pass directly to children or grandchildren instead of becoming part of the original beneficiary's future estate
■ A trust is created for appropriate beneficiaries
■ The original will failed to use available tax allowances effectively
■ The intestacy rules produce an unsuitable or tax-inefficient result

For example, an adult child who already has a substantial estate may redirect an inheritance to their own children. If the deed meets the tax requirements, the transfer can be treated as having been made by the deceased rather than as a gift from the adult child.

This may avoid the inherited assets first increasing the adult child's estate and then potentially being taxed again when that child later dies.

Leaving Money to Charity

Gifts to qualifying charities are generally exempt from Inheritance Tax.

Where at least 10% of the relevant net estate is left to charity, the rate of Inheritance Tax on the taxable part of that estate may be reduced from 40% to 36%.

A deed of Variation can sometimes be used to increase a charitable gift after death and secure the reduced rate. However, the calculation is technical and professional advice should be obtained before the Variation is completed.

Using a Spouse's Unused Allowance

In earlier years, a deed of Variation was sometimes used following the first death in a marriage because unused nil-rate bands could not be transferred to the surviving spouse.

Unused nil-rate bands can now generally be transferred between spouses and civil partners. This means that a deed of Variation may not be required solely to preserve the first person's unused allowance.

However, a variation may still be appropriate where the estate plan is unsuitable, assets should pass to a different generation or other tax and family considerations apply.

Who Must Agree to the Variation?

Any beneficiary whose inheritance is reduced or otherwise adversely affected must consent to the Variation.

A beneficiary cannot use a deed of Variation to take property away from another beneficiary without that person's agreement.

Particular difficulties can arise where a child, someone lacking mental capacity or an unborn beneficiary is affected. Court approval may be required because those individuals cannot simply consent to giving up part of their entitlement.

Can the Executors Make the Decision?

Executors cannot normally alter beneficiaries' inheritances merely because they consider a different distribution fairer or more tax-efficient.

The beneficiary giving up the inheritance must usually approve the change. Executors may also need to join in the document where the Variation affects the administration of the estate or changes the amount of Inheritance Tax payable.

Does a Deed of Variation Have to Be Sent to HMRC?

A copy does not normally need to be sent to HMRC where the Variation does not affect the amount of Inheritance Tax payable.

Where the Variation changes the estate's Inheritance Tax liability, HMRC will usually need to be informed and the relevant documentation submitted. The executors may also need to amend the estate's tax account.

Can a Beneficiary Receive Payment for Agreeing?

Specialist advice should be taken where a beneficiary will receive money or another benefit in exchange for redirecting their inheritance.

A variation made for consideration may not receive the intended retrospective Inheritance Tax or Capital Gains Tax treatment. It may instead be treated as a separate transaction by the beneficiary.

Capital Gains Tax

A properly prepared deed of Variation can also contain a statement asking for the redirection to be treated as having been made by the deceased for Capital Gains Tax purposes.

This can be important where an asset has increased in value since the date of death. However, electing for the tax treatment is not always beneficial, and the Capital Gains Tax consequences should be reviewed before the document is signed.

Can a Deed of Variation Be Used After Intestacy?

A deed of Variation can be used where the deceased left a will or died intestate.

Where someone dies without a valid will, the intestacy rules determine who inherits. A beneficiary under those rules may agree to redirect their entitlement, provided the Variation is completed correctly and within the applicable time limit.

Other Ways to Plan for Inheritance Tax

A deed of Variation is only one part of Inheritance Tax planning. Other matters that may need to be considered include:

■ Making or updating a will
■ Lifetime gifts
■ The seven-year rule
■ The annual gift exemption
■ Gifts made from surplus income
■ Spouse and civil-partner exemptions
■ Charitable gifts
■ Business Relief and Agricultural Property Relief
■ Trusts
■ Life assurance written in trust
■ Pension nominations and death benefits

Tax planning should not be undertaken solely to reduce a future tax bill. Individuals should retain sufficient assets and income to meet their own needs and should consider care costs, family circumstances and the possibility that tax rules may change.

Changes to the Treatment of Pensions

From 6 April 2027, most unused pension funds and pension death benefits are due to be brought within a deceased person's estate for Inheritance Tax purposes.

This is a significant change because many discretionary pension death benefits have historically fallen outside the estate. Personal representatives will generally be responsible for reporting and paying the Inheritance Tax attributable to affected pension benefits.

Death-in-service benefits payable from registered pension schemes are expected to remain outside the new rules.

People who have relied on pensions as a way of passing wealth to the next generation should review their estate planning, pension nominations and wills before the new treatment takes effect.

Inheritance Tax Receipts

Inheritance Tax remains a relatively small part of total government revenue, but the amount collected has increased considerably since the original article was written.

HMRC collected £938.8 billion across all taxes during the 2025 to 2026 tax year. Inheritance Tax receipts for April and May 2026 alone were approximately £1.4 billion.

Frozen tax thresholds, higher property values and growth in investment and pension wealth mean that more estates may be brought within the scope of the tax.

Obtaining Legal and Tax Advice

A deed of Variation can have consequences for Inheritance Tax, Capital Gains Tax, trusts, benefits, care funding and the future estates of the beneficiaries.

Once completed, a variation may be difficult or impossible to reverse. Beneficiaries and executors should obtain advice from a solicitor and, where appropriate, a qualified tax adviser before signing the document or distributing the affected assets.

Important Information

Solicitors.com is not a firm of solicitors. This article is provided for general information only and does not constitute legal, financial or tax advice. Tax thresholds, allowances and legislation may change, and their application will depend on the individual circumstances. You should seek advice from a suitably qualified solicitor or tax adviser before taking or refraining from action.