Deed of Variation Inheritance Tax UK (2026): How to Redirect an Inheritance to Save IHT

A deed of variation (also called a deed of family arrangement) is a legal document that allows one or more beneficiaries to redirect their inherited assets to different beneficiaries — after the deceased has died. For inheritance tax purposes, the key statutory provision is IHTA 1984 s.142: (1) THE BASIC CONCEPT: a beneficiary who has inherited assets under a will (or under the intestacy rules) can redirect some or all of those assets to another person. The deed of variation treats the redirected assets as if they had been left directly by the deceased — not as a gift from the varying beneficiary. This is the critical tax advantage: no 7-year rule (no potentially exempt transfer by the varying beneficiary); the assets are treated as passing from the estate on death; (2) THE LEGAL PROVISION — IHTA 1984 s.142: 'where within the period of two years after a person's death any of the dispositions (whether effected by will, under the law relating to intestacy or otherwise) of the property comprised in his estate immediately before his death are varied... the variation shall not constitute a transfer of value'; (3) PRACTICAL EFFECT: the HMRC treats the varied disposition as if the deceased had made it. So if a child redirects £100,000 of their inheritance to their own children (the deceased's grandchildren), HMRC treats the deceased as having left £100,000 directly to the grandchildren. No IHT charge on the child's estate (no PET). No 7-year clock; (4) WHO CAN VARY: the beneficiary (or beneficiaries) who are giving up their entitlement must be party to the deed. Minor beneficiaries cannot vary their entitlement without court approval (under the Variation of Trusts Act 1958 or the court's inherent jurisdiction). A personal representative may need to join the deed if the variation affects IHT or CGT; (5) FORMAL REQUIREMENTS (IHTA 1984 s.142(1)): (a) In writing (deed — although strictly only a written document is required by s.142, a deed is standard practice); (b) Made within 2 years of the date of death; (c) Signed by the varying beneficiary (the one giving up entitlement); (d) Must contain a written statement that s.142 IHTA 1984 applies (and/or s.62(6) TCGA 1992 for CGT); (e) Notified to HMRC within 6 months of execution if additional IHT is payable; (6) NO CONSIDERATION: the varying beneficiary must not receive any consideration (cash payment or other benefit) from the new beneficiary in return for the variation. If consideration is paid, s.142 does not apply.

There are several ways a deed of variation can reduce the total IHT payable on a death: (1) USING THE FIRST DECEASED'S NRB/RNRB: if the deceased left everything to their surviving spouse (exempt from IHT under s.18 IHTA 1984), no IHT was due on the first death. However, the deceased's NRB (£325,000) and RNRB (up to £175,000) are carried forward and available to the surviving spouse's estate via the transferable NRB (ss.8A-8M) and transferable RNRB (s.8H). A deed of variation could redirect part of the first deceased's estate directly to children, using the NRB/RNRB on the first death — effectively doubling the amount passed tax-free earlier; (2) REDIRECTING TO CHARITY (36% REDUCED RATE): if beneficiaries redirect enough of the estate to charity to bring the charitable proportion to 10% or more of the net estate, the remainder of the taxable estate is taxed at 36% instead of 40%. The Finance Act 2012 introduced this reduced rate (IHTA 1984 s.7(4)). A deed of variation can achieve this posthumously — the beneficiaries effectively donate part of the inheritance to charity to reduce the IHT rate on the rest; (3) SKIPPING A GENERATION: if the estate passes to adult children who have large estates of their own, they may vary their inheritance to pass directly to their children (the deceased's grandchildren). The assets skip the adult child's estate entirely — no IHT on the adult child's eventual death on those assets. Particularly valuable when the adult child's estate is already above the IHT threshold; (4) USING BUSINESS PROPERTY RELIEF (BPR) OR AGRICULTURAL PROPERTY RELIEF (APR): if specific BPR/APR-qualifying assets pass to the surviving spouse (exempt) and the spouse does not qualify for BPR/APR on those assets (e.g. because they would not hold the assets for the required 2 years), a variation redirecting those assets to qualifying beneficiaries preserves the relief; (5) MAKING A WILL TRUST IN HINDSIGHT: if the deceased died without using a nil-rate band discretionary trust in their will, a deed of variation can create one posthumously — redirecting NRB assets from the surviving spouse into a discretionary trust for the children, using the NRB of the first deceased rather than adding it to the survivor's estate; (6) IHT COST/BENEFIT ANALYSIS: always weigh the IHT saving against: (a) income tax (the varying beneficiary loses income from the redirected assets); (b) CGT (see next question); (c) the varying beneficiary's own financial needs. A variation should only be made where the beneficiary can genuinely afford to give up the assets.

For capital gains tax (CGT), a deed of variation can also be treated as if it were made by the deceased — but only if a specific s.62(6) TCGA 1992 election is included in the deed: (1) THE CGT PROVISION — TCGA 1992 s.62(6): s.62(6) provides that if the deed of variation contains a statement that the parties intend s.62(6) to apply, the variation is treated for CGT purposes as a disposition made by the deceased. This means: (a) the new beneficiary acquires the asset at its probate value (not the varying beneficiary's cost); (b) any gain since the date of death is CGT-free for the varying beneficiary (no disposal for CGT purposes); (2) MAKING THE ELECTION: the deed of variation must include an explicit statement that s.62(6) TCGA 1992 (and/or s.142 IHTA 1984) applies. A standard deed prepared by a solicitor will include these elections automatically. Do not use a DIY deed without legal assistance — missing the election creates an unexpected CGT liability; (3) WHEN THE CGT ELECTION MATTERS: if assets have increased in value since the date of death (e.g. listed shares that have risen in value; property that has appreciated), the varying beneficiary would have a CGT gain if they were treated as making a gift. The s.62(6) election prevents this; (4) WHEN THE CGT ELECTION DOES NOT HELP: if the varying beneficiary wants to keep the CGT base cost at probate value for the new beneficiary (rather than treating the variation as a disposal for CGT), they should use the election. If the new beneficiary would prefer to inherit at an even lower base cost (e.g. because the estate value was low), they might not elect — but this is unusual; (5) SEPARATE ELECTIONS FOR IHT AND CGT: the IHTA 1984 s.142 and TCGA 1992 s.62(6) elections are separate. A deed can elect for one and not the other, depending on the family's circumstances. For example: (a) Both elections: asset treated as passing from deceased for both IHT and CGT (most common); (b) Only IHT election: variation treated as a PET for CGT purposes (the varying beneficiary makes a disposal for CGT but the IHT position is improved); (c) Only CGT election: rare and rarely beneficial; (d) No elections: the variation is an outright gift for both IHT (PET; 7yr clock) and CGT (disposal). A solicitor specialising in estate planning should advise on which combination is optimal.

The two-year time limit is an absolute deadline — there is no discretion to extend it: (1) THE DEADLINE: the deed of variation must be executed (signed as a deed) within 2 years of the date of death (IHTA 1984 s.142(1)). The death date is day 0; the 2-year anniversary of the death is the final day; (2) NO EXTENSIONS: HMRC has no power to extend the 2-year period. If the beneficiaries miss the deadline, a deed of variation cannot achieve the statutory IHT/CGT treatment under ss.142/62(6). The variation would simply be an outright gift by the beneficiary (a PET for IHT; a disposal for CGT); (3) WHY PEOPLE MISS THE DEADLINE: (a) Long estate administrations — complex estates with business assets, overseas property, or IHT disputes can take more than 2 years to administer. By the time the beneficiaries receive their inheritance, the window may have closed; (b) Disputes — if the will is contested, beneficiaries may be waiting for the outcome before considering a variation; (c) Minor beneficiaries — a court application is needed to vary a minor's entitlement (which typically adds months); (d) Beneficiaries not in contact — if beneficiaries are estranged or in different jurisdictions, obtaining signatures takes time; (4) PRACTICAL ADVICE: do not wait for the estate to be fully administered before considering a variation. A deed of variation can be executed as soon as the beneficiaries know what they are receiving — even before assets are distributed. Execute the deed within months of death, before the 2-year deadline is at risk; (5) NOTIFICATION TO HMRC (s.142(2)): if the variation results in additional IHT being payable (e.g. assets are redirected away from exempt beneficiaries to non-exempt beneficiaries), the personal representative or the new beneficiary must notify HMRC within 6 months of the deed. The 6-month notification deadline is separate from the 2-year execution deadline.

Yes — a deed of variation can redirect assets inherited under the intestacy rules just as effectively as assets inherited under a will: (1) INTESTACY: IHTA 1984 s.142 IHTA 1984 and TCGA 1992 s.62(6) apply equally to variations of intestacy entitlements and will entitlements. The key is that the varying beneficiary has inherited under 'the dispositions... of the property comprised in his estate immediately before his death' — which includes the intestacy rules; (2) WHY INTESTACY VARIATIONS ARE PARTICULARLY VALUABLE: the intestacy rules (Administration of Estates Act 1925) are rigid and often produce suboptimal tax outcomes. Common intestacy tax problems that a variation can fix: (a) Everything to the surviving spouse — the deceased's NRB and RNRB are unused at the first death (carried forward but sitting in the survivor's growing estate); a variation can redirect up to £500,000 (NRB + RNRB) to children directly, using the thresholds at the first death; (b) Surviving spouse receives a large estate they do not need — adult children can redirect their share of the deceased's estate away from the spouse (to themselves or grandchildren) if the spouse's estate is already large; (c) Cohabiting partner — under intestacy, a cohabiting partner receives nothing. Beneficiaries (e.g. children) can redirect inherited assets to the partner by way of variation; (3) THE DISCLAIMER ALTERNATIVE: a disclaimer (rather than a deed of variation) is an outright refusal to accept an inheritance. A disclaimed inheritance passes under the will or the intestacy rules as if the disclaiming beneficiary had predeceased. Differences: (a) A disclaimer cannot be made if any benefit has been received from the estate (even interest on cash); (b) A disclaimer cannot redirect assets to a specific new beneficiary — it simply falls back into the estate; (c) Deeds of variation are more flexible (redirect to specified beneficiaries); disclaimers are simpler (no HMRC elections needed); (4) PRACTICAL STEPS: a deed of variation where there is no will should be prepared by a solicitor. The solicitor will identify all intestacy beneficiaries, draft the deed, arrange signatures, and lodge it with HMRC as required.