Why a deed of variation can repair an estate plan—but cannot replace proper post-death tax analysis

In my previous article, I considered the estate plan of Marco, an Italian-born entrepreneur who had lived in the United Kingdom for many years.

His will had been prepared in 2015.

Since then, his business had increased substantially in value, the family home had appreciated, he had inherited an apartment in Italy and his pension fund had grown. His wife had a different UK residence history, while the tax rules governing foreign assets, Business Relief and pensions had all changed.

The will remained legally valid.

The tax plan behind it had not aged nearly as well.

Now suppose that Marco dies before the will is reviewed.

His family brings the document to the executors. They assume that the difficult decisions have already been made.

Then the estate valuation begins.

The business is worth more than expected. The discretionary trust in the will may prevent the family home from qualifying for the residence nil rate band. The spouse exemption may not operate without restriction because Marco’s wife is not a long-term UK resident. The Italian property creates a separate succession and tax process. The pension position must be checked under the rules applying at the date of death.

The first article asked what tax result the will would produce.

The next question is more urgent:

Can the family still change that result after Marco’s death?

Sometimes it can.

But the answer is not simply: “Do a deed of variation.”

The first mistake would be to distribute the estate too quickly

After a death, families understandably want matters resolved.

A surviving spouse may need access to money. Children may expect particular assets. The family business still needs decisions. Property costs continue, and inheritance tax may need to be paid before the grant of probate can be obtained.

There is pressure to move.

This is precisely when I would slow the process down.

Before the executors make material distributions, the family needs to understand what passes under the will, what passes outside it, which exemptions and reliefs are actually available and whether the proposed administration could create additional tax consequences.

The estate should first be mapped.

That exercise normally includes:

• the assets legally and beneficially owned by the deceased;
• jointly owned property;
• lifetime gifts and potentially exempt transfers;
• trusts in which the deceased had an interest;
• business and company interests;
• pension and death-benefit arrangements;
• liabilities;
• the residence histories of the deceased and surviving spouse;
• the beneficiaries’ circumstances; and
• any foreign wills, assets or succession proceedings.

Until that work has been done, nobody knows what requires variation.

A deed drafted too early may solve the wrong problem.

A deed of variation does not rewrite the will

The expression “deed of variation” can be misleading.

It sounds as though the deceased’s will is reopened and replaced.

That is not quite what happens.

A beneficiary who has inherited under a will, intestacy or certain other dispositions arising on death may redirect all or part of that entitlement. If the statutory conditions are met, the parties can elect for the variation to be treated for inheritance tax purposes, and potentially capital gains tax purposes, as though the revised disposition had been made by the deceased.

The legal effect arises from the beneficiary’s variation. The special tax treatment may then read the revised disposition back to the death.

That distinction matters.

The deceased is not retrospectively making a new will. The beneficiaries are deciding to alter what they receive, and the legislation determines whether that alteration can be treated as made by the deceased for specified tax purposes.

It follows that a variation is not an unlimited power to redesign the entire estate.

It operates on the disposition being varied and requires the participation of those whose entitlements are affected.

The two-year period is real

For the statutory reading-back treatment, the variation must be made in writing within two years of the death.

The relevant beneficiaries must be parties to the instrument. There must generally be no consideration in money or money’s worth for giving up the entitlement, other than a permitted variation or disclaimer of another interest in the same estate. The instrument must also contain the appropriate statement that the relevant inheritance tax and, where required, capital gains tax provisions are intended to apply.

HMRC summarises the conditions in its Capital Gains Manual.

The two years should not be treated as a comfortable period during which nothing needs to happen.

Estate valuations can take time. HMRC may question the value of private company shares. Foreign probate or succession procedures may move at a different pace. Beneficiaries may disagree. Trust and property questions may require legal analysis. A minor or unborn beneficiary may be affected.

If the family begins considering the tax position twenty-two months after the death, the fact that a theoretical two-year window exists may be of little practical assistance.

Not every beneficiary can simply agree

Suppose Marco’s discretionary trust benefits his wife, his adult children and future grandchildren.

The family may agree that the trust should be removed and the residence should pass directly to the children.

But the interests of minor, unborn or contingent beneficiaries cannot simply be signed away by the adults.

A parent’s signature on behalf of a minor is not sufficient. Where a variation adversely affects such interests, court approval may be required to achieve full validity.

HMRC expressly recognises this limitation in its Inheritance Tax Manual.

This is one reason why post-death planning becomes more difficult once complex trusts are involved.

The people who consider the variation commercially sensible may not have the legal power to bind everyone whose interest would be affected.

Fixing the residence nil rate band requires more than naming the children

Marco’s family home was worth £1.4 million.

Under his will, it passed into a discretionary trust for his wife and children.

The family assumed that the residence nil rate band would apply because the children were beneficiaries of the trust.

That conclusion was not safe.

The residence nil rate band depends on a qualifying residential interest being “closely inherited” by direct descendants. The identity of the potential beneficiaries is only part of the analysis. The form in which they inherit is also critical.

Certain trust structures can qualify. A general discretionary trust will not necessarily do so merely because children or grandchildren are included within the class of beneficiaries.

A variation might redirect the residence, or an appropriate interest in it, to direct descendants in a way that satisfies the statutory requirements.

But that should not be considered in isolation.

The estate may exceed the £2 million taper threshold. Other assets may affect the available allowance. There may be a transferred residence nil rate band from a predeceased spouse. The family may not want the children to own the house outright. There may be divorce, asset-protection or occupation concerns.

An IHT saving of up to £70,000 from preserving a £175,000 residence nil rate band is valuable.

It is not necessarily worth dismantling a family protection arrangement without considering what replaces it.

Tax efficiency is part of estate planning. It is not the only objective.

The business created a different problem

Marco’s shares in the family trading company were valued at £6 million.

The will placed them into the same discretionary trust.

For deaths and other relevant transfers from 6 April 2026, the value of qualifying business and agricultural property benefiting from 100% relief is subject to a £2.5 million allowance, potentially increased by a transferred unused allowance from a predeceased spouse or civil partner. Qualifying value above the available 100% allowance is generally relieved at 50%, subject to the detailed rules.

HMRC describes the revised Business Relief framework in its Inheritance Tax Manual.

The family therefore needed to establish more than whether the company was “a trading company”.

It needed a proper valuation and a review of:

• whether the shares constituted relevant business property;
• whether the minimum ownership conditions were satisfied;
• whether the company’s activities were wholly or mainly trading rather than investment;
• whether excepted assets reduced the relief;
• whether lifetime transfers had used any part of the available allowance;
• whether a transferred allowance was available; and
• how the relief interacted with the will and other exemptions.

There was also a practical cash-flow issue.

Business Relief no longer necessarily removes the full taxable value. A valuable family company may produce an IHT liability without producing the cash with which to pay it.

From 6 April 2026, qualifying Business Relief assets can generally benefit from interest-free payment of the relevant tax by ten annual instalments, provided the statutory conditions continue to be met. If the asset is sold, the outstanding tax may become payable. The current payment rules are set out on GOV.UK.

That may ease the liquidity problem.

It does not decide who should inherit the shares.

The spouse exemption needed to be tested before assets were redirected

The family’s instinct was to transfer more of the estate to Marco’s wife.

That might defer IHT and give her greater financial security.

However, the post-6 April 2025 residence-based rules required the spouse exemption to be examined carefully.

If Marco was a long-term UK resident but his wife was not, the exemption for transfers to her could be restricted. The couple’s respective UK residence histories therefore mattered.

The family also needed to consider the longer-term result.

Passing everything to the surviving spouse may reduce the tax on the first death but enlarge the survivor’s estate. It may waste relief attached to particular assets, defer a business succession problem or expose future growth to IHT in the survivor’s hands.

A spouse variation should therefore be modelled across both deaths.

The first-death tax saving is not the same as the family’s overall tax saving.

The pension did not necessarily follow the will

Marco’s pension documentation had to be reviewed separately.

A deed of variation of the estate cannot simply redirect every pension or death benefit as though it were governed by the will. The scheme rules, trustee or provider discretion, beneficiary nominations and the legislation applying at the date of death all need to be considered.

For deaths on or after 6 April 2027, most unused pension funds and pension death benefits are brought within the individual’s estate for IHT purposes, subject to the statutory exclusions. The treatment is explained in the Government’s technical note on inheritance tax and pensions.

That does not mean the pension necessarily becomes an estate asset for all legal purposes.

Nor does it mean that changing the will changes the pension destination.

The IHT calculation, the scheme’s distribution decision and the beneficiaries’ income tax position must be analysed separately.

This is an area where using the word “estate” too loosely can produce serious mistakes.

The Italian apartment could not be varied on a UK-only analysis

Marco’s apartment in Italy was included in the UK IHT analysis because of his long-term UK residence status.

It was also an Italian asset subject to Italian succession and tax rules.

The executors could not assume that a UK deed of variation would automatically be recognised in Italy as if Marco had made a different testamentary disposition.

The legal devolution of the property, the applicable succession law, any Italian will, forced-heirship considerations, land-registration requirements and Italian inheritance taxes all needed to be reviewed locally.

There was also a double-tax question.

The same asset might be included in both the UK and Italian death-tax computations. Any relief would need to be claimed under the relevant UK rules and applicable treaty arrangements, with the values, liabilities, exchange rates and taxes properly reconciled.

A variation that improves the UK result could alter the Italian result or create an Italian gift or succession issue.

For cross-border estates, the sequence should be:

1. determine how the asset passes under each relevant legal system;
2. calculate the tax result in each jurisdiction;
3. identify available double-tax relief; and
4. only then decide whether a variation improves the combined position.

Optimising one country in isolation is not international estate planning.

Capital gains tax should not be forgotten

Inheritance tax is often the reason a variation is considered, but it is not the only relevant tax.

On death, assets generally acquire a capital gains tax base cost linked to their probate value. A qualifying instrument of variation can contain the appropriate election for the CGT reading-back provisions to apply.

That may prevent the redirection itself from being treated as a disposal by the original beneficiary.

But the family still needs to understand the future CGT position of the person receiving the asset.

Suppose Marco’s wife varies valuable business shares to the children. The immediate redirection may receive the intended CGT treatment, but the children will hold an asset with a base cost derived from the death value. Future growth, any later sale and any available reliefs then belong to their tax profile.

The probate valuation therefore matters twice.

It affects IHT at death and the future CGT position.

A deliberately low valuation is not prudent tax planning. It may reduce the apparent IHT exposure but create a larger future gain, while exposing the executors to a valuation challenge.

Private company shares, foreign property and unusual assets should be valued on a defensible basis.

A variation cannot repair every problem

A deed of variation is powerful, but it has limits.

It cannot change the facts at the date of death.

It cannot make non-qualifying business assets qualify for Business Relief.

It cannot erase lifetime gifts.

It cannot make a spouse satisfy a residence condition that was not met.

It cannot guarantee that an overseas jurisdiction will apply UK tax fiction.

It cannot bind beneficiaries who lack capacity simply because the rest of the family agrees.

It cannot alter a pension distribution that does not form part of the relevant estate disposition.

And it cannot rescue a planning exercise started after the two-year deadline.

It should be used to implement a considered solution, not as a substitute for identifying the problem.

Sometimes no variation is the correct answer

After modelling the estate, Marco’s family may decide not to vary the will.

The trust may remain valuable for asset-protection or family reasons. Redirecting the business to the children may give them control before they are ready. Passing more assets to the surviving spouse may create a larger tax exposure on her later death. Altering the Italian succession position may introduce costs or legal uncertainty.

The purpose of the review is not to manufacture a deed.

It is to establish whether the existing result remains acceptable and, if not, whether a valid variation produces a better overall outcome.

Sometimes the tax saving justifies the change.

Sometimes the non-tax consequences outweigh it.

And sometimes the apparent tax problem disappears once the estate, ownership and reliefs are calculated correctly.

The post-death review should begin immediately

In a substantial or cross-border estate, I would normally organise the work into five connected areas.

First, establish the legal devolution of every material asset, including jointly owned property, trusts, pensions and foreign assets.

Second, prepare defensible date-of-death valuations and calculate the initial IHT position.

Third, test spouse exemption, residence nil rate band, Business and Agricultural Relief, lifetime transfers and pension treatment.

Fourth, model possible variations across both the UK and any foreign jurisdictions.

Finally, align the tax analysis with probate, liquidity and the longer-term needs of the beneficiaries.

The family should be shown the difference between:

• the result under the existing will;
• the result after any proposed variation;
• the tax cost in each jurisdiction;
• the assets and control received by each beneficiary; and
• the future tax and succession consequences.

Only then should the legal document be drafted.

The question is not whether the will can be changed

Marco’s family originally asked:

“Can we change the will after death?”

The more useful question was:

“Which part of the estate result needs changing, who has the legal power to change it, and does the variation improve the family’s overall position?”

Those are not drafting questions alone.

They require the will, the estate, the reliefs, the beneficiaries and the foreign assets to be examined as one plan.

A deed of variation can sometimes repair the route by which assets pass.

It cannot compensate for failing to understand where that route leads.

And the two-year clock begins on the date of death, not when the family finally realises that the tax result is wrong.

How Vectigalis Tax can assist

Vectigalis Tax advises UK and internationally connected individuals, executors, families and business owners on the tax aspects of estate administration and post-death planning.

Our work includes:

• reviewing wills and estate ownership from a UK IHT perspective;
• modelling spouse exemption and residence nil rate band;
• analysing Business and Agricultural Relief;
• reviewing pension death-benefit treatment;
• calculating the effect of lifetime gifts and trusts;
• considering deeds of variation and other post-death elections;
• coordinating UK and foreign estate-tax positions;
• identifying and modelling double-tax relief; and
• working with solicitors, STEP practitioners, executors, notaries and overseas advisers to implement the agreed plan.

Our role is not to replace the solicitor responsible for probate or legal drafting.

It is to establish the tax result before the family commits to a distribution or variation.

That order matters.

First understand how the estate passes.

Then calculate the tax.

Then decide whether anything should be changed.

Angelo Chirulli, FCA, ADIT, TEP
Dual-qualified UK Chartered Accountant and Italian Dottore Commercialista

Vectigalis AC Tax
www.vectigalistax.co.uk

Mail: angelo@vectigalistax.co.uk

This article is for general information and does not constitute tax, legal or accounting advice. The outcome depends on the will, asset ownership, residence history, family circumstances, date of death, applicable legislation and the laws of each jurisdiction involved.