Deed of Variation on a Will: The IHT and Capital Gains Consequences, Worked With Numbers

A deed of variation lets the people who inherit redirect their share of an estate within two years of the death — and if it carries the right wording, the law treats the gift as if the deceased made it, not the beneficiary. That single device can avoid a 7-year gift clock, drop the inheritance tax rate from 40% to 36% by topping a charity gift up to 10%, and move an asset to someone else without a capital gains tax bill. The catch: the IHT and CGT treatments are two separate elections, and each one has to be written into the deed expressly or it does not happen.

What a deed of variation actually does

A deed (or instrument) of variation is a document by which a beneficiary gives up some or all of what they inherit and directs it elsewhere — to a child, a trust, or a charity. It does not rewrite the will. Legally, the gift still passes under the will to the original beneficiary first, and then the deed redirects it. What makes the variation powerful is a tax fiction: with the right statement included, the redirection is "read back" to the date of death and treated as though the deceased had made it.

GOV.UK sets out the headline conditions: the change must be made within two years of the death, and any beneficiary left worse off must agree (gov.uk — How to change a will after a death). The reading-back fiction sits in section 142 of the Inheritance Tax Act 1984 for IHT and section 62(6) of the Taxation of Chargeable Gains Act 1992 for CGT.

The IHT "reading back": why it is not a PET

Normally, if you inherit £100,000 and immediately hand it to your child, that is a potentially exempt transfer (PET) from you. You then have to survive seven years for it to fall out of your own estate; die within that window and it claws back into your IHT calculation.

A deed of variation sidesteps this entirely. When the deed states that section 142(1) IHTA 1984 is to apply, the law treats the £100,000 as having passed straight from the deceased to your child — as if it had been written into the original will. Because the gift is deemed made by the deceased, it is never a gift by you. There is no PET, no 7-year clock against your estate, and nothing claws back if you die soon after. That is the structural advantage that no ordinary lifetime gift can match.

The statement is mandatory. The reading-back does not happen automatically just because a deed exists. Section 142(2) IHTA 1984 requires the instrument to contain an express statement that the makers intend section 142(1) to apply. Leave it out and you have simply made a normal PET in slow motion.

Worked example: pushing a charity gift over the 10% line

The reduced rate of IHT is one of the most under-used reasons to use a deed of variation. Leave at least 10% of the "baseline amount" to charity and the rate on the taxable estate falls from 40% to 36% (gov.uk — Giving to charity to reduce an Inheritance Tax bill; form IHT430).

The 10% is not measured against the whole estate. It is measured against the baseline amount — broadly the value of the estate after deducting the available nil-rate band and any other reliefs and exemptions, with the charitable gift added back in (HMRC IHT Manual, IHTM45002; Schedule 1A IHTA 1984).

Read that table carefully. Giving £50,000 to charity costs the children only £25,000 of inheritance (£755,000 → £730,000), because the IHT bill falls by £25,000 (£70,000 → £45,000) at the same time. A £50,000 charitable legacy is funded half by HMRC. The gift is genuinely generous — the charity does get the full £50,000 — but the family is barely £25,000 worse off for it. That is the leverage the 36% rate creates, and a deed of variation is how a family achieves it after the death, when they can see the actual numbers.

Standard figures used: nil-rate band £325,000 per person, standard rate 40%, reduced charity rate 36% — all per gov.uk — How Inheritance Tax works. Always check the form IHT430 worksheet, because where an estate has more than one "component" (e.g. a settled-property element or jointly-held property), the 10% test can be applied component-by-component and the maths is more involved.

The separate CGT reading-back election

Inheritance tax is only half the story. Where the deed redirects an asset (shares, a property, a fund holding) rather than cash, capital gains tax can bite — and it has its own, separate election.

On death there is a CGT "uplift": the estate acquires assets at their probate value (market value at the date of death), and gains accrued during the deceased's lifetime are wiped out. If a beneficiary later redirects an asset that has risen in value since the death, that disposal can crystallise a gain in the beneficiary's hands.

Section 62(6) TCGA 1992 fixes this — but only if elected. When the deed contains the CGT statement that section 62(6) is to apply, the redirection is read back so the new beneficiary is treated as having acquired the asset from the estate at the probate value. The act of varying is then not a disposal by the original beneficiary, so no CGT charge arises on the redirection itself (HMRC Capital Gains Manual, CG31600 onwards).

Why both statements must be in the deed wording

This is the single most important practical point and the one most often missed in home-made variations: the IHT election and the CGT election are independent of each other, and neither happens unless the deed says so.

• IHT reading-back needs an express statement that s142(1) IHTA 1984 applies.
• CGT reading-back needs a separate express statement that s62(6) TCGA 1992 applies.

You can elect for one without the other. Sometimes that is deliberate — for example, taking the IHT reading-back to keep a gift out of your estate while declining the CGT reading-back because realising a small gain (covered by an exemption) is harmless and gives the new owner a higher base cost. The point is that a competent practitioner makes the choice on purpose and writes it down. A deed that is silent on CGT does not get the CGT treatment, and a deed silent on IHT does not get the IHT treatment — full stop. Once made, these elections are irrevocable, so the wording has to be right the first time.

Reporting to HMRC and recalculating the IHT400

What you have to send HMRC depends on whether the variation changes the tax:

• If the variation increases the IHT due, GOV.UK requires you to send a copy to HMRC within six months of making the variation (gov.uk).
• If it leaves the IHT unchanged or reduces it, you do not have to send a copy. Keep the signed deed with the estate papers.

If the IHT400 account has already been submitted — as in Margaret's case, where executors filed before the children decided to add the charity gift — the variation changes the figures and you should notify HMRC of the corrected position. In practice the executors write to HMRC's IHT office quoting the estate reference, enclose a copy of the deed (with the s142 statement on it), and set out the recalculated tax. To claim the reduced 36% rate, the reduced-rate computation is supported by form IHT430. HMRC then reissues the IHT calculation; because Margaret's varied estate pays £45,000 instead of £70,000, the executors would expect a refund of the £25,000 overpaid (with any repayment interest HMRC adds). Where IHT was paid on the estate's date-of-death value and the deed reduces it, the correction flows through the same channel.

A practical note on timing: the charity gift in a variation is treated as the deceased's, so it qualifies for the 36% rate even though the death has already happened and the IHT400 is in — that retrospective reach is the whole point of reading-back. Just keep within the two-year window.

Frequently asked questions