Deeds of Variation: Redirecting an Inheritance and the Two-Year Deadline

What Is a Deed of Variation?

A deed of variation, sometimes called a deed of family arrangement or an instrument of variation, is a document under which a beneficiary of an estate gives up part or all of their entitlement in favour of somebody else.

An informal redirection of a beneficiary’s entitlement would simply be a gift from the beneficiary, with all the tax consequences that follow. The beneficiary would have made a potentially exempt transfer and would need to survive seven years for it to fall out of their estate.

Section 142 of the Inheritance Tax Act 1984 changes that. Where the conditions are met, the redirection is read back and treated for inheritance tax purposes as though the deceased had made it. The beneficiary’s own estate is not affected, and no seven-year clock starts running.

A parallel provision, section 62(6) of the Taxation of Chargeable Gains Act 1992, for the most part achieves the same reading back for capital gains tax, so the original beneficiary does not face a dry charge on assets that have risen in value since the death.

The Two Year Deadline

The variation must be made within two years of the date of death. That is the single most important thing to know about the mechanism, and the most common reason families miss it.

The period runs from death, not from the grant of probate, not from the date the estate is distributed, and not from the date anyone first hears about the opportunity. In an estate that takes eighteen months to reach a grant, the window can be nearly closed before beneficiaries have had a conversation about how the estate could be distributed.

There is no discretion to extend it.

The Conditions That Must Be Met

There are five requirements, all of which need to be satisfied.

1. The variation must be in writing and made within two years of death.
2. It must be signed by every beneficiary whose entitlement is reduced.
3. It must contain an express statement that section 142(1) IHTA 1984 is to apply, and, where capital gains treatment is also wanted, that section 62(6) TCGA 1992 is to apply. HMRC publishes suggested wording, and the statement is not optional.
4. It must not be made for consideration in money or money’s worth from outside the estate. A beneficiary who is paid to sign it takes the arrangement entirely outside section 142.
5. The same property cannot be varied twice—one redirection per asset.

It does not have to be by deed as a matter of strict law, although in practice one is normally used. Nor, since 2002, does it usually have to be sent to HMRC, unless the variation increases the inheritance tax due on the estate, in which case a copy must be delivered within six months.

What a Variation Can Achieve

The uses fall into a few recognisable categories.

Why April 2026 Made This More Urgent

From 6 April 2026, the inheritance tax treatment of business and agricultural property changed. The 100% rate of agricultural property relief and business property relief is now capped: qualifying property up to a combined allowance of £2.5 million attracts relief at 100%, and value above that attracts relief at 50%, producing an effective inheritance tax rate of 20% on the excess. Where unused allowance transfers from a pre-deceased spouse or civil partner, the allowance can reach £5 million.

Shares traded on but not listed on a recognised stock exchange, including AIM shares, now attract 50% relief rather than 100%.

The consequence for existing wills is significant. Many were drafted around the assumption that relief was unlimited. A common clause leaves all relievable property to a child and everything else to the surviving spouse. Under the new regime, that wording could result in unexpected inheritance tax.

Where the deceased died after 6 April 2026, and the will predates the reform, a variation is one of the few routes available to put the position right, subject, of course, to the variation being effected within that crucial two-year window.

The addition of a threshold to business and agricultural property relief is still relatively recent, and clients are still adapting to the new regime. Practitioners have focused heavily on lifetime planning opportunities. Wills are regularly reviewed, but there is a risk that a clause leaving relievable assets to children, for example, is still in place on the death of a testator, which could result in unintended inheritance tax. In such circumstances, we would generally recommend executing a deed of variation, as it remains an extremely valuable tool to avoid additional strain for a family already in mourning.

Where a Variation Stops Being Simple

Redirecting a cash legacy from one adult to another is a short document. Several situations are more complex, and an unconsidered variation can cause more difficulty than it solves.

Estates that include a trust

Where the variation creates a settlement rather than an outright gift, the question of who is the settlor becomes central, and the answer is not the same for each type of tax. For inheritance tax purposes, the testator is treated as the settlor when a variation is effected. For capital gains tax purposes, if the individual who undertakes the variation retains an interest in the settlement, he could be treated as settlor with the chargeable gains under the settlement accruing to him. For income tax purposes, there is no equivalent statutory provision to s142 IHTA 1984, so the individual creating the deed of variation is treated as the settlor if they retain an interest under that settlement. The income of the settled property will be taxed as the income of that person. Similarly, if that person’s minor children are beneficiaries, payments to or for the benefit of those minors are taxed as the income of their parent. In these circumstances a disclaimer may be more beneficial than a variation, and advice should be sought on this alternative.

Family businesses and shareholdings

A redirection of shares can affect control, shareholder agreements, pre-emption rights and the availability of relief itself. The two-year holding requirement for business property relief and the identity of the person treated as making the transfer both need checking before anything is signed.

Beneficiaries who are minors or unborn

A beneficiary can vary only their own entitlement, and only if they are an adult with capacity. Where the interest to be varied belongs to a child, or to unborn beneficiaries, court approval is required. That is a slower process, and it has to start well within the two-year window rather than towards the end.

Estates with a foreign element

A variation is effective for United Kingdom tax. It does not bind another jurisdiction, and a redirection that is efficient here may create an unexpected charge, or simply fail to take effect, where assets or beneficiaries sit abroad.

Anything already distributed

A variation is still possible after assets have been distributed, and even after they have been sold or reinvested, but the practical and drafting complications increase considerably.

What a Deed of Variation Cannot Do

There are four limits which are worth stating plainly.

A variation does not rewrite the will for all purposes. It redirects a beneficiary’s entitlement, with retrospective effect for two specific taxes.

It does not work for income tax. Income arising before the variation belongs to the original beneficiary, and where a trust is created, the varying party is generally the settlor for income tax purposes.

It will not defeat a local authority assessment for care fees, or a means test for benefits. Deprivation of assets rules look at substance, and the fact that a redirection is read back for inheritance tax does not make it invisible elsewhere.

A variation cannot be undone. Once the same property has been varied, it cannot be varied again.

Practical Steps If You Have Recently Inherited

1. Diarise the second anniversary of the death now, and work back from it.
2. Establish what you have actually inherited, including whether any of it qualifies for business or agricultural relief.
3. Consider whether you need it. The most common reason to vary is that the inheritance simply adds to a taxable estate that is already exposed.
4. Identify everyone whose entitlement would be reduced. They all have to sign.
5. Take advice before you distribute, sell or reinvest anything you may want to redirect.
6. If minors or unborn beneficiaries are involved, start early, because court approval takes time.

Where a deed of variation may not be appropriate

There are, of course, circumstances where a deed of variation can prove disadvantageous. The requirement to undertake a variation within two years, and the fact that a variation cannot be undone, can lead to hasty decisions driven by a tax saving. Beneficiaries may regret such decisions in due course. The complexities of a settlement established by Will can also cause headaches for an individual undertaking an instrument of variation. It is always sensible to take advice in these circumstances.