Deed of variation: Why it should always be carefully considered

Sometimes, even with good intentions, the allocation of assets and property when a loved one passes away can have unwelcome side effects. This was a harsh lesson one family learnt, when one spouse tried to leave half of a property to children - but it soon turned out this physically wasn’t possible.

Mr and Mrs Smith, both in their seventies, were recently featured in an article in the Times. They were separated, but owned their £1m North London family home as joint tenants - even though Mrs Smith lived in a care home two miles away.

Mr Smith, with all good intentions, drafted his will in 2008 stating that upon his death, he would like his “half” of the property to be left to his children. However, in the eyes of the law, this is not possible, because a joint tenancy means both parties own the entire property together, so in the event of either spouse’ death the other would automatically inherit. A solicitor asked Mr Smith to update his will in 2017 but the later copy was never signed and sadly, this only came to light after Mr Smith passed away.

While in law, his share of the property is automatically inherited by Mrs Smith, their children are requesting that their father’s wishes are respected - something that Mrs Smith has agreed to as long as it is done in the most tax efficient way possible.

A deed of variation can sometimes be useful in circumstances such as these as it can be made before or after probate but would need to be written within two years of Mr Smith’s death. The deed could then be used to alter the arrangement with the property and Mrs Smith, so that she and the children would own it as tenants in common, instead of joint tenants.

The value of Mr Smith’s half share of the house would be the valuation as at the date of his death so  there would be no Capital Gains Tax (CGT) to pay on the property’s value at the point of inheritance. However, Mrs Smith and the children should be wary of any Inheritance Tax (IHT) which may be due on the property - particularly if Mr Smith had made any lifetime gifts in the seven years before he died.  Also Mrs Smith can only complete a deed of variation if she has mental capacity to do so and is not in effect gifting assets in order to avoid paying for care.

Of course, this all comes with a major caveat. A deed of variation can have unwelcome side effects - particularly where property is owned by different generations. Plus, if either party is divorced or has  been or likely to be made bankrupt, then there could be other considerations or complications. When it comes to tax, there is no “one size fits all”, so it is really important that all options are carefully considered.

If you would like some more information about deeds of variation, or you are planning to draft or update your will, contact the Private Client team at Downs Solicitors to see how we can help.

Liz Dalgetty

Liz Dalgetty

Consultant Solicitor & Notary Public

Tel: +44 (0) 1306 502251

Office: Dorking Office