Deed of Variation for Inherited Property: Redirecting an Inheritance Without a Fresh CGT Bill

A will written years, sometimes decades, before death rarely lands perfectly once the estate actually comes to be administered. A rental property left outright to a child who has no need of the income and already has their own estate to worry about is a common shape of the problem — the will was correct in law, just no longer the most sensible outcome for the family. A deed of variation is the fix the law provides for exactly this situation, but it only works within a narrow window, and only if it's drafted with both taxes it touches in mind.

What a deed of variation does

A deed of variation is a document signed by a beneficiary, redirecting some or all of what they've inherited to someone else. Left alone, that would ordinarily be treated as a gift from the beneficiary to the new recipient, carrying its own Inheritance Tax and Capital Gains Tax consequences. What makes a deed of variation different is a pair of statutory elections: under IHTA 1984 s.142 and TCGA 1992 s.62(6), a properly drafted deed is read back as though the deceased had left the estate to the new recipient in the first place. For IHT purposes, the redirection isn't a gift by the original beneficiary at all — it doesn't start a seven-year clock running against them, and it's the estate, not the beneficiary, whose IHT position is recalculated. For CGT, no disposal is treated as having been made by the original beneficiary on the redirection itself.

Because the two reliefs sit in different Acts and serve different taxes, a deed intended to have full effect needs to state expressly that both s.142 IHTA 1984 and s.62(6) TCGA 1992 are to apply. A deed silent on one of them risks getting the read-back treatment for only one tax, leaving the other assessed on the ordinary gift rules — a drafting slip that's easy to make and expensive to discover after the two-year window has closed.

The two-year deadline is a cliff edge, not a guideline

The deed has to be executed within two years of the date of death. HMRC has no statutory discretion to extend that period for any reason — probate taking longer than expected, family negotiations dragging on, or simply not knowing the rule existed until it's too late are all common explanations we hear, and none of them move the deadline. Missing it doesn't stop a family from agreeing to redirect an inheritance between themselves; it just means the redirection is treated as an ordinary gift by the original beneficiary, with the IHT and CGT consequences that follow from that, rather than getting the statutory read-back treatment.

For an inherited property specifically, that timing pressure is worth planning around from the start of administering the estate, rather than being raised for the first time as the deadline approaches. If a redirection is even a possibility, identifying it early leaves time to draft the deed properly, get every affected beneficiary's agreement in writing, and value the property correctly — rather than trying to complete all of that in the final weeks before the two years run out.

What it does not do: rebase the property for CGT

A deed of variation is not a second death for CGT purposes. Whoever ends up owning the property as a result of the variation still takes it at its probate value at the date of death — the same base cost that would have applied had the deceased left it to them directly. This matters most where CGT on an inherited property is being planned around a later sale: redirecting the property to a beneficiary in a lower tax bracket, or one with their full annual exempt amount still available, can genuinely reduce the CGT due on an eventual sale, but it does so by changing who owns the gain, not by resetting how much gain there is to tax.

Common uses for an inherited property

• Redirecting to a surviving spouse or civil partner. Transfers between spouses are exempt from IHT, so redirecting a property to a surviving spouse who wasn't originally left it can remove it from the taxable estate entirely, and may also restore access to the transferable nil-rate band or residence nil-rate band on the spouse's own later death.
• Skipping a generation. An adult child who doesn't need the property, and whose own estate is already likely to be taxable, can redirect it straight to their own children. Done within the two-year window, that keeps the property out of the child's estate altogether, rather than passing through it and being taxed twice across two generations.
• Correcting an intestacy. Where someone dies without a will, the intestacy rules can produce a distribution that doesn't reflect what the family actually wants, particularly around unmarried partners or stepchildren who inherit nothing under the statutory order. A deed of variation, agreed by the beneficiaries who do inherit, can redirect part of the estate to put that right.
• Settling a property into trust. Redirecting an inherited property into a trust rather than to an individual can suit a beneficiary who wants the asset protected or managed for others, though this needs weighing against the trust's own IHT entry charge and ten-yearly periodic charges before it's used.

Telling HMRC when the deed increases the tax due

Not every deed of variation needs to be reported to HMRC as a standalone step. Where the redirection results in more Inheritance Tax becoming payable than under the original will or intestacy — typically because the deed moves value away from an exempt beneficiary such as a spouse or charity, and toward one who isn't exempt — IHTA 1984 s.218A requires whoever is party to the deed to notify HMRC within six months of it being made. Overlooking this notification doesn't undo the deed's effect, but it leaves the estate's IHT position understated in HMRC's records until the point is picked up, with interest running on the shortfall from the original payment deadline in the meantime.

A separate point worth flagging for property specifically: because a deed of variation redirects an inheritance rather than sells it, and no consideration passes between the parties, it doesn't generally trigger an SDLT charge on the property being redirected. That's a useful distinction from a straightforward sale or a transfer for value between family members, which can trigger SDLT depending on any consideration or assumed debt involved.

Common mistakes

• Missing the two-year deadline because the possibility of a variation wasn't considered until late in administering the estate
• Drafting a deed that references only the IHT or only the CGT election, rather than expressly electing for both s.142 IHTA 1984 and s.62(6) TCGA 1992 to apply
• Assuming the property gets a fresh CGT base cost on redirection, when the probate value at death still stands regardless of who the deed leaves it with
• Forgetting that income received from the property between the date of death and the date of the deed is still assessed on the original beneficiary — the read-back covers IHT and CGT, not income tax
• Failing to notify HMRC under s.218A within six months where the variation increases the IHT payable, leaving the estate's position understated
• Accepting money or other consideration from outside the estate in exchange for making the variation, which can undermine the statutory treatment entirely

What this means for families dealing with an inherited property

A deed of variation is a genuinely useful second chance where a will, or an intestacy, hasn't landed in the most sensible place for the family left behind — but it's a narrow one, bounded by a deadline HMRC won't move and by drafting requirements that need both taxes addressed explicitly. Where an inherited property is involved and any redirection is even under discussion, it's worth raising with whoever is administering the estate as early as possible, so there's time to draft it properly rather than racing the two-year clock at the end.

Common questions

How long do you have to execute a deed of variation after death?

Two years from the date of death, under IHTA 1984 s.142(1). HMRC has no power to extend this deadline for any reason, so a deed signed even a day late cannot get the statutory IHT and CGT read-back treatment, whatever the circumstances behind the delay.

Does a deed of variation reset the Capital Gains Tax base cost of an inherited property?

No. The base cost for CGT purposes stays the property's probate value at the date of death, regardless of who ends up owning it after the variation. What changes is who is treated as having inherited the property in the first place, and therefore who is taxed on any gain when it is eventually sold.

Do you have to tell HMRC about a deed of variation?

Only if the variation results in more Inheritance Tax being payable than under the original will or intestacy. Where that's the case, IHTA 1984 s.218A requires the parties to notify HMRC within six months of making the deed. Variations that reduce or leave IHT unchanged don't need to be reported to HMRC in the same way, though a copy is generally sent to whoever is dealing with the estate's tax affairs.

This article is general information, not personal tax advice, and tax rules change. Your own position depends on facts we cannot see from here — please take advice before acting on anything above.

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