Inherited the Wrong Assets? You May Have Two Years to Put It Right

Most people assume that once somebody has died, the terms of their Will—or the intestacy rules where there is no Will—are fixed.

That is not always the case.

A beneficiary may be able to redirect all or part of an inheritance using an instrument of variation, commonly known as a Deed of Variation.

Used correctly, a Deed of Variation can help a family correct an outdated Will, improve the tax position of an estate, provide for somebody who was overlooked, redirect wealth to the next generation or place inherited assets into an appropriate trust.

The critical point is timing.

For the variation to receive the special inheritance tax and capital gains tax treatment available under legislation, it must generally be completed within two years of the date of death.

That two-year period is an opportunity—but it is also a hard deadline.

What Is a Deed of Variation?

A Deed of Variation allows somebody who has inherited under a Will or intestacy to change the destination of some or all of their entitlement.

In practical terms, the original beneficiary gives up the inherited property in favour of another person, a charity or, where appropriate, a trust.

Despite the commonly used name, the variation does not always have to be executed as a formal deed. HMRC confirms that a written letter or other written instrument may be sufficient, provided that it meets the relevant legal and tax requirements. In more substantial cases, however, a properly drafted deed will generally provide clearer evidence of the parties’ intentions and reduce the possibility of later disagreement. (GOV.UK⁠)

The variation does not rewrite the deceased person’s Will in its entirety. It changes the destination of the particular inheritance being redirected.

Why Would Somebody Redirect an Inheritance?

There are many legitimate reasons.

The original beneficiary may already have sufficient wealth and may not need the inheritance.

They may prefer the assets to pass directly to their children or grandchildren.

A family member who was financially dependent on the deceased may have been omitted from the Will.

The Will may have been prepared many years earlier and may no longer reflect the family’s circumstances.

The inheritance may increase the beneficiary’s own future inheritance tax exposure.

The family may wish to place the assets under structured control rather than transferring them outright to an inexperienced, vulnerable or financially exposed beneficiary.

A variation can therefore be used as a succession-planning tool, a tax-planning tool or simply as a means of producing a fairer family outcome.

The Two-Year Rule

To obtain retrospective treatment for inheritance tax under section 142 of the Inheritance Tax Act 1984, the variation must be completed within two years of the deceased’s death.

All parties whose consent is required must sign within that period. HMRC has no general discretion to extend the deadline simply because probate was delayed, the family was unaware of the rules or professional advice was obtained too late. (GOV.UK⁠)

The deadline runs from the date of death, not:

• the date probate is granted;

• the date the estate is distributed;

• the date the beneficiary becomes aware of the inheritance; or

• the date the executors complete the administration.

A variation may be made before probate has been obtained. Families should therefore not assume that they must wait for the entire estate administration to be completed before considering the available options. (GOV.UK⁠)

The Importance of Retrospective Tax Treatment

The distinguishing feature of a qualifying Deed of Variation is that, for certain inheritance tax and capital gains tax purposes, the redirected property can be treated as though the deceased had left it directly to the new recipient.

That can be extremely important.

Without the statutory treatment, the original beneficiary may simply be regarded as having received the inheritance and then made a lifetime gift of their own property.

That could create a potentially exempt transfer, a chargeable lifetime transfer, a capital gains tax disposal or other unintended consequences.

A correctly drafted variation may instead allow the tax analysis to be applied as though the revised destination had appeared in the deceased’s Will from the outset.

However, this retrospective treatment is not automatic merely because a document is headed “Deed of Variation”.

The instrument must satisfy the statutory conditions and should include the appropriate statement of intention where inheritance tax or capital gains tax treatment is being claimed.

HMRC’s published wording refers expressly to section 142(1) of the Inheritance Tax Act 1984 and section 62(6) of the Taxation of Chargeable Gains Act 1992. (GOV.UK⁠)

Who Must Sign?

The person giving up or reducing their inheritance must normally be a party to the variation.

The central question is whose beneficial entitlement is being adversely affected.

A person receiving an increased benefit does not ordinarily have to sign merely because they are the new recipient. However, additional consent may be required where the variation affects the rights of other beneficiaries, including beneficiaries with future or contingent interests. (GOV.UK⁠)

Executors do not automatically need to be parties simply because they administer the estate. Their involvement may nevertheless be necessary where:

• the variation increases the inheritance tax payable;

• estate assets have not yet been distributed;

• the executors are being asked to transfer property to a different recipient;

• the change affects the administration of the estate; or

• the document imposes obligations upon them.

The precise parties must be identified from the Will, intestacy position, trust terms and administration history.

This is one reason why generic online templates can be dangerous. The drafting may appear simple while the underlying beneficial interests are anything but.

Can a Child’s Inheritance Be Varied?

A minor cannot ordinarily give up an inheritance by signing a Deed of Variation.

Nor can a parent simply sign away a child’s entitlement because they believe another arrangement would be preferable.

Where a variation would reduce the entitlement of a minor, an unborn beneficiary or somebody without the necessary legal capacity, court approval may be required.

The same issue can arise where the original Will creates contingent, discretionary or successive interests.

The fact that the adult family members agree does not necessarily mean that they have authority to alter somebody else’s beneficial entitlement.

Can a Deed of Variation Be Used Where There Is No Will?

Yes.

A qualifying variation can alter an entitlement arising under the intestacy rules as well as an entitlement under a Will.

This can be particularly valuable where the statutory intestacy provisions produce an outcome the family did not expect.

For example, an adult child who inherits under intestacy may decide to redirect all or part of their entitlement to:

• the deceased’s unmarried partner;

• another sibling;

• grandchildren;

• a vulnerable relative;

• a charity; or

• an appropriately structured trust.

The same two-year deadline and technical requirements must still be observed.

Redirecting an Inheritance to Children or Grandchildren

One of the most common uses of a Deed of Variation is to skip a generation.

A parent may inherit from their own parent but conclude that the wealth would be better directed immediately to their children.

Where the statutory conditions are met, the transfer may be treated for inheritance tax purposes as having been made by the deceased rather than as a lifetime gift by the original beneficiary.

This can avoid the original beneficiary having to survive a further seven years for the redirected amount to fall outside their estate.

That does not mean that every inheritance should automatically be passed down.

The family must consider:

• whether the original beneficiary may need the capital later;

• whether the younger generation can manage the assets responsibly;

• divorce, bankruptcy and creditor exposure;

• vulnerability or disability;

• education and housing requirements;

• the recipient’s existing tax position; and

• whether outright ownership is appropriate.

Passing assets down quickly is not always the same as passing them down wisely.

Using a Deed of Variation to Create a Trust

A beneficiary may redirect inherited assets into a trust rather than passing them outright to another person.

This can provide:

• professional or family oversight;

• protection for vulnerable beneficiaries;

• structured access to capital;

• continuity following death or incapacity;

• protection from poor decision-making;

• greater control over the timing of distributions; and

• a framework for preserving assets across generations.

However, creating a trust through a Deed of Variation is not simply a matter of adding the words “to be held on trust”.

The trust terms must be properly drafted and the tax treatment carefully examined.

Depending on the structure, there may be:

• Trust Registration Service obligations;

• inheritance tax entry, anniversary or exit charges;

• trustee income tax liabilities;

• capital gains tax considerations;

• reporting and record-keeping obligations;

• issues concerning the identity of the settlor; and

• consequences if the person giving up the inheritance may themselves benefit.

HMRC guidance confirms that a trust established through a variation may need to be treated as coming into existence when the variation is made or when the relevant assets become available to the trustees. It should not automatically be assumed to qualify as a trust created directly by the deceased’s Will for every regulatory or tax purpose. (GOV.UK⁠)

This distinction is important.

A variation may be retrospective for specified inheritance tax and capital gains tax purposes without rewriting history for every other tax, trust or regulatory rule.

Inheritance Tax Planning

A variation can alter the inheritance tax outcome of the deceased’s estate.

Redirecting Assets to a Spouse or Civil Partner

Where assets are redirected to a surviving spouse or civil partner, additional spouse exemption may become available, provided the statutory conditions are satisfied.

This can reduce the inheritance tax due on the first death.

However, it may simply defer the tax rather than eliminate it, because the assets may then form part of the survivor’s estate.

The wider plan should therefore consider:

• the survivor’s existing wealth;

• their future expenditure;

• residence nil-rate band availability;

• transferable allowances;

• remarriage;

• asset growth;

• care needs; and

• the likely tax exposure on the second death.

A tax saving on the first death can become a larger tax problem on the second if the planning stops halfway.

Redirecting Assets to Charity

A variation may redirect inherited property to a qualifying charity.

This may generate charitable exemption and, in suitable cases, may affect the inheritance tax rate applied to the taxable estate.

The deed must correctly identify the charity and the amount or property being redirected.

The family should also distinguish between a genuine charitable redirection and a proposal under which value is expected to return to the original beneficiary. The latter may not achieve the intended treatment.

Redirecting Assets Away from a Wealthy Beneficiary

Where a beneficiary already has an inheritance tax exposure, receiving a substantial inheritance may compound the problem.

A variation may allow that inheritance to pass directly to the next generation or into an appropriate trust without first increasing the original beneficiary’s estate.

This is frequently one of the most valuable planning opportunities following a death.

Capital Gains Tax

Death itself is not normally treated as a disposal for capital gains tax.

The personal representatives generally acquire the deceased’s assets at their market value at the date of death, and an inherited asset normally carries that probate value as its base cost. (GOV.UK⁠)

A qualifying variation can be treated as retrospective for capital gains tax purposes where the statutory conditions are satisfied.

This means that the redirection itself may not be treated as a disposal by the original beneficiary. HMRC’s guidance requires:

• a written instrument;

• completion within two years of death;

• the participation of those giving up the entitlement;

• no prohibited consideration in money or money’s worth; and

• the appropriate statutory statement. (GOV.UK⁠)

This can be particularly important where the inherited asset has increased in value since death.

Nevertheless, a Deed of Variation does not erase gains arising after the date of death. The new recipient will ordinarily inherit the relevant tax history and base cost arising under the applicable rules.

The timing of any later sale must therefore be considered separately.

The Prohibition on Consideration

A qualifying variation must not ordinarily be made in return for money or money’s worth coming from outside the estate.

In plain English, the original beneficiary should not be paid or privately compensated for surrendering the inheritance.

For example, difficulties may arise where:

• one sibling gives up part of an inheritance in return for cash from another sibling;

• the new recipient agrees to transfer an unrelated asset;

• there is a private side agreement;

• the variation forms part of a wider commercial bargain; or

• the original beneficiary receives some other measurable financial advantage.

HMRC permits certain reciprocal variations involving dispositions from the same estate, but consideration from outside the estate can prevent the special statutory treatment from applying. (GOV.UK⁠)

Families should disclose the full agreement to their adviser. A deed that records only half of the bargain may be ineffective and potentially misleading.

Can the Same Assets Be Varied More Than Once?

Multiple variations are possible in some circumstances, particularly where they concern different assets or separate entitlements.

However, the legislation does not provide an unlimited ability to repeatedly rewrite the destination of the same property while claiming retrospective treatment each time.

A second variation affecting property that has already been redirected requires particular care.

The family should not assume that each new document resets the position or creates a fresh two-year period. It does not.

Does the Beneficiary Have to Receive the Inheritance First?

No.

A variation can be completed before the estate is distributed.

Indeed, it is often cleaner for the executors to transfer the relevant property directly to the revised recipient once the deed has been completed.

However, a variation may still be possible after the original beneficiary has received the property, provided:

• the two-year period has not expired;

• the property can still be properly identified;

• the beneficiary remains capable of redirecting it;

• no disqualifying transaction has occurred; and

• the statutory requirements are satisfied.

Practical complications increase once property has been sold, mixed with other assets, mortgaged, spent or transferred.

Early advice is therefore far preferable to attempting to reconstruct the position close to the deadline.

Must the Deed Be Sent to HMRC?

Not every Deed of Variation must automatically be submitted to HMRC.

Where the variation does not alter the inheritance tax due, a copy will not ordinarily need to be sent merely because the deed has been completed.

Where the variation results in more inheritance tax becoming payable, HMRC states that a copy must be sent within six months of making the variation. (GOV.UK⁠)

Where a tax refund, revised exemption or other change is being claimed, the personal representatives and advisers must ensure that the relevant inheritance tax account, calculation and supporting documentation are dealt with correctly.

The HMRC IOV2 checklist can be used to assess whether the instrument satisfies the statutory conditions, but it does not replace appropriate legal and tax analysis. (GOV.UK⁠)

A Deed of Variation Is Not the Same as a Disclaimer

A disclaimer generally involves a beneficiary refusing an inheritance.

The beneficiary normally cannot choose where the disclaimed property goes. It passes according to the Will or intestacy provisions as though the beneficiary had not accepted it, subject to the precise legal position.

A Deed of Variation is more flexible because the beneficiary can ordinarily specify the revised recipient.

A disclaimer may also have to cover the whole of a particular benefit, and the beneficiary must not already have accepted or benefited from the property being disclaimed. (GOV.UK⁠)

The correct route depends on the desired outcome.

Common Mistakes

The errors we see most frequently are avoidable.

Waiting for Probate

The family waits for the grant, property sale or final estate accounts before taking advice, only to discover that the two-year deadline is approaching.

Treating the Two-Year Period as Approximate

It is not.

All required parties must complete the instrument within the statutory period. “Almost within two years” has no recognised tax status.

Using a Generic Template

A template may not identify the correct parties, property, tax elections, trust provisions or original entitlement.

Ignoring Capital Gains Tax

The inheritance tax analysis may work while the capital gains tax treatment has been overlooked.

Redirecting Property That No Longer Exists

The deed must operate upon an identifiable entitlement or item of property. It cannot retrospectively redirect an interest that has ceased to exist. (GOV.UK⁠)

Compensating the Original Beneficiary

A private agreement to pay the beneficiary can prevent the variation qualifying for retrospective treatment.

Creating a Trust Without Considering Administration

A trust brings ongoing responsibilities. Trusteeship, registration, taxation, investment, distributions, records and future charges must all be considered.

Focusing Only on Immediate Tax

A variation may reduce inheritance tax today while placing assets in the estate of another person who has an even greater future exposure.

A Practical Example

Assume a widowed mother leaves an estate of £800,000 equally to her two adult children.

One child needs the inheritance.

The other child is already financially secure and has an estate likely to exceed the available inheritance tax allowances.

That child could simply receive £400,000 and later gift it to their own children.

However, unless another relief applies, that would ordinarily be their lifetime gift. They may need to survive seven years before it falls outside their estate for inheritance tax purposes.

Alternatively, within two years of the mother’s death, the child may execute a qualifying Deed of Variation redirecting some or all of the £400,000:

• directly to their children;

• partly to their children and partly to charity; or

• into a properly designed trust for their family.

Where the conditions are met, the redirected inheritance may be treated for inheritance tax purposes as passing from the mother rather than as a gift made by the child.

The economic destination may look similar, but the legal and tax route is fundamentally different.

The iTrust View

At iTrust121, we do not view a Deed of Variation as a form to be completed after somebody dies.

It is a second opportunity to review the family’s entire succession plan.

The correct questions are not simply:

“Can we change the Will?”

or:

“Can we save inheritance tax?”

The better questions are:

• Who actually needs the inheritance?

• Whose estate should the assets sit within?

• Should the assets pass outright or under controlled stewardship?

• Is any beneficiary vulnerable, inexperienced or exposed?

• Will the variation solve a tax problem or merely move it?

• Should professional trustees be involved?

• How will the arrangement operate over the next ten, twenty or thirty years?

• Does the revised plan fit with the Wills, trusts and lasting powers of attorney of the wider family?

A Deed of Variation can be extraordinarily effective, but only where the legal drafting, tax analysis and long-term family objectives are aligned.

The two-year window should not be treated as a reason to delay.

It should be treated as a period in which the family has one valuable opportunity to reconsider where the inherited wealth should go, how it should be held and who should control it.

Once that window closes, many of the same transfers may still be possible—but the retrospective tax treatment may be lost.

The lesson is simple:

Do not distribute a substantial estate before asking whether the inheritance is passing to the right people, in the right form and under the right structure.

James Berkeley
Senior Counsel
iTrust121 Ltd

This article provides general information only and does not constitute legal or tax advice. The effectiveness and taxation of a Deed of Variation depend upon the terms of the Will or intestacy, the assets involved, the beneficiaries’ circumstances and the precise drafting of the instrument. Specialist advice should be obtained before any inheritance is redirected.