Deeds of Variation on Freehold Properties

Deeds of Variation play a crucial role in property law and estate planning, particularly for freehold properties. As experts in property solutions, Innovus recognises the importance of understanding these legal instruments. This guide will explore Deeds of Variation, their uses, and implications for freehold property owners and beneficiaries.

What is a Deed of Variation?

A Deed of Variation is a legal document that allows beneficiaries to make changes to their entitlement from a will or intestacy after a person’s death. For freehold properties, it can be used to alter how the estate is distributed, potentially leading to more tax-efficient outcomes or addressing changed circumstances.

Uses of Deeds of Variation on Freehold Properties

Deeds of Variation have several applications for freehold properties:

• Redistributing assets among beneficiaries
• Including new beneficiaries not mentioned in the original will
• Altering the share of the estate each beneficiary receives
• Creating trusts to manage property assets
• Addressing changes in circumstances since the will was written

Legal Requirements and Considerations

For a Deed of Variation to be valid, it must meet certain legal criteria:

• All affected beneficiaries must agree to the changes
• The deed must be executed within two years of the date of death
• It must clearly state that the parties intend for the variation to be effective for tax purposes
• The document must be signed and witnessed according to legal standards

It’s important to note that a Deed of Variation cannot be used to remove or change executors named in the will.

Tax Implications

Inheritance Tax (IHT)

One of the primary reasons for using a Deed of Variation is to reduce the amount of inheritance tax payable on an estate. By redirecting assets, it’s possible to take advantage of tax allowances and exemptions that weren’t utilised in the original will.

For example, assets redirected to a spouse or civil partner are usually exempt from IHT, and gifts to charities can reduce the overall IHT rate on the estate.

Capital Gains Tax

A Deed of Variation can also have implications for Capital Gains Tax (CGT). If a beneficiary varies their entitlement to pass on an asset, they’re not treated as having made a disposal for CGT purposes. This can be beneficial if the asset has increased in value since the date of death.

For more information on inheritance tax and capital gains tax, visit the official HMRC website.

The Process of Creating a Deed of Variation

The process typically involves these steps:

1. Identifying the need for a variation
2. Consulting with all affected parties
3. Drafting the deed (usually done by a solicitor)
4. Getting all parties to sign and witness the document
5. Informing HMRC if the variation affects the tax position of the estate

Time Limits and Deadlines

A crucial aspect of Deeds of Variation is the time limit. To be effective for tax purposes, the deed must be executed within two years of the date of death. This deadline is strict, and missing it can have significant tax implications.

Potential Challenges and Limitations

While Deeds of Variation are powerful tools, they have limitations:

• All affected beneficiaries must agree to the changes
• They cannot be used to increase someone’s share of the estate (unless gifted by another beneficiary)
• They may have unintended consequences if not carefully considered
• Mortgage lenders may need to approve changes if the property is mortgaged

When to Seek Professional Advice

Given the complexities involved, it’s advisable to seek professional advice when considering a Deed of Variation. Situations where expert guidance is particularly valuable include:

• Estates with significant assets or complex structures
• Cases involving business assets or agricultural property
• Scenarios with potential conflicts among beneficiaries
• Situations where tax planning is a key objective

Deeds of Variation can be valuable tools for managing freehold properties in estates, offering flexibility and potential tax benefits. However, they require careful consideration and expert handling to ensure they achieve the desired outcomes without unintended consequences.

Link to the Land Registry’s practice guide on Deeds of Variation