Deed of Family Arrangement Tax Implications: IHT, CGT, SDLT

The tax implications of a deed of family arrangement fall into three areas where the arrangement can save real money — inheritance tax, capital gains tax, and stamp duty land tax — and one area where it cannot help, which is income tax generated during the estate’s administration. When the deed meets the statutory conditions, HMRC treats the redirected inheritance as though the deceased had written it into the will from the start. Miss any condition and the deed becomes a plain gift between living people, with none of those advantages.

What Changes and What Doesn’t

The mechanism doing the work is the “reading-back” rule. For inheritance tax purposes it sits in Section 142(1) of the Inheritance Tax Act 1984; for capital gains tax it sits in Section 62(6) of the Taxation of Chargeable Gains Act 1992.¹² Stamp duty land tax has its own exemption for qualifying variations of estates.³ Income tax is deliberately left outside all three: income continues to be taxed on whoever was actually entitled to receive it when it was earned.

The will itself is not rewritten. It stays as it was. What shifts is the tax treatment of who received what, and that shift only happens if the paperwork does exactly what the statutes require.

Conditions the Deed Must Meet

Five conditions have to be satisfied together. Missing one loses the tax treatment for the whole redistribution.

The instrument must be executed within two years of the deceased’s death. The deadline is absolute and cannot be extended.¹
It must be in writing. A formal deed is not strictly required, and even a letter can qualify if it meets the other conditions, but an oral agreement has no tax effect.⁴
Every beneficiary who is giving up a benefit must sign. Beneficiaries who are only receiving additional assets do not need to sign.¹
The document must state that the parties intend the variation to be read back to the deceased. For inheritance tax the statement has to reference Section 142(1) of the Inheritance Tax Act 1984; for capital gains tax it also has to reference Section 62(6) of the Taxation of Chargeable Gains Act 1992.⁵
No one can receive consideration in money or money’s worth for agreeing. The only permitted “consideration” is another variation or disclaimer within the same arrangement.¹

The statement of intent deserves particular attention. Citing only the inheritance tax provision leaves the capital gains treatment unavailable, so a deed that ought to have handled both taxes ends up handling only one.⁵

Inheritance Tax Effect

Under Section 142, the original beneficiary is treated as never having been entitled to the redirected assets, and the new beneficiary is treated as receiving them directly from the deceased.¹ Because the redistribution is read back into the death itself, the estate’s inheritance tax calculation is redone on the new figures.

The savings are largest when assets move toward an exempt recipient. Transfers to a surviving spouse or civil partner, and transfers to qualifying charities, are exempt from inheritance tax. If the original will left everything to adult children, redirecting a portion of the estate to the surviving spouse cuts the taxable value by the redirected amount. With the nil-rate band frozen at £325,000 through at least April 2030 and inheritance tax charged at 40% above that threshold, the effect on the bill can be substantial.⁶

If inheritance tax has already been paid on the original distribution and the recalculation produces a lower bill, the personal representative can file amended figures, and the estate may be entitled to a refund.

Capital Gains Tax Effect

Without a qualifying deed, a beneficiary who hands an inherited asset to someone else is making a disposal, and any growth in value between the date of death and the date of the handover is taxable. Section 62(6) removes that problem: the variation is not treated as a disposal at all, and the new beneficiary is treated as acquiring the asset directly from the deceased at the date of death.²

Two practical effects follow. The original beneficiary triggers no tax event by giving up the asset. And the new beneficiary’s base cost for future capital gains calculations is the probate value — the asset’s market value at the date of death — rather than its value on the day the deed was signed. Any appreciation during the administration period effectively drops out of the tax system, which for property or shares can mean serious money.

Again, this only works if the deed cites Section 62(6). A deed that recites only the inheritance tax provision keeps the reading-back for IHT but loses it for CGT.⁵

Stamp Duty Land Tax on Property

Transferring real estate under a qualifying deed of family arrangement is exempt from stamp duty land tax if the transfer takes place within two years of death and the person receiving the property gives no consideration in money or money’s worth.³

One point catches people out. Taking on an existing mortgage secured against the property does not count as giving consideration for SDLT purposes. A beneficiary who accepts a mortgaged property through a deed of variation still gets the exemption. Cash payments or side agreements would disqualify it, but the secured debt itself does not. Where the exemption applies, families avoid residential SDLT rates that run from 2% up to 12%.

Why Income Tax Is Different

Income tax does not read back. Rental income, dividends, and bank interest arising during the administration period are taxed in real time based on who was actually entitled to receive them, regardless of what a later deed says.

During administration, the personal representative deals with income tax on behalf of the estate. When income is eventually paid out, the personal representative issues a Form R185 certificate showing the income distributed and the tax already deducted. The beneficiary then reports that income on their own return and either pays more tax at higher rates or reclaims some if they are a basic-rate or non-taxpayer.⁷

A deed does not retroactively move income tax liability. Whoever was entitled to income when it was earned still owes tax on it. Only income arising after the deed takes effect belongs to the new beneficiary for income tax purposes.

When You Must Tell HMRC

Whether HMRC needs a copy of the deed depends on the direction the tax bill moves. If the variation increases the inheritance tax due, you must send HMRC a copy within six months of executing the deed. If it reduces the bill or leaves it unchanged, there is no obligation to send a copy, although keeping the paperwork is sensible.⁴

Variations do sometimes push the bill up. A surviving spouse might redirect part of an exempt inheritance to an adult child, deliberately accepting a higher inheritance tax charge in order to move money to the next generation sooner. That is a perfectly valid use of a deed, but HMRC has to be told.

Variation Compared with a Disclaimer

A variation lets you say where your inheritance goes. A disclaimer is a flat refusal, and the disclaimed share passes according to the will’s substitutionary provisions, or, if there are none, under intestacy rules. Both can qualify for reading-back under Section 142, and both must be made within two years of death.¹

If you want the assets to reach someone who isn’t already next in line, only a variation gets you there. A disclaimer also carries a stricter practical constraint: you cannot disclaim once you have accepted any benefit from the inheritance. Collecting rent, spending dividends, or otherwise treating the asset as your own closes off the disclaimer route. A variation can still be made after benefits have been received, as long as it falls within the two-year window.

1
Legislation.gov.uk. Inheritance Tax Act 1984 – Section 142
2
Legislation.gov.uk. Taxation of Chargeable Gains Act 1992 – Section 62
3
GOV.UK. Stamp Duty Land Tax Manual – SDLTM00560
4
GOV.UK. Change a Will After a Death
5
GOV.UK. Inheritance Tax Manual – IHTM35028
6
GOV.UK. Inheritance Tax Thresholds and Interest Rates
7
GOV.UK. Reporting an Estate’s Income to HMRC