Deed of Variation and Capital Gains Tax: Deadline and Conditions

A deed of variation and capital gains tax interact through a specific statutory election: if beneficiaries redirect an inheritance within two years of the death and include the right wording in the deed, section 62(6) of the Taxation of Chargeable Gains Act 1992 treats the redirection as if the deceased had made it, so no disposal happens and no CGT arises.¹ The person receiving the redirected assets takes them at probate value, the same base cost the original beneficiary would have had. Miss the deadline or leave out the election wording, and the transfer is a personal disposal that can create a real tax bill on any growth since the date of death.

How the Reading-Back Works

When someone dies, their assets are deemed under section 62(1) of the TCGA 1992 to have been acquired at market value on the date of death.¹ That figure, the probate value, becomes the base cost for whoever ends up with them. If a beneficiary later signs a deed of variation redirecting those assets, section 62(6) treats the variation as though the will itself had directed the new distribution. There is no disposal by the original beneficiary, and the new recipient acquires the assets at that same probate value.

HMRC’s Capital Gains Manual confirms this works retrospectively to the date of death when the conditions are met. If the assets are still held by personal representatives when the deed is signed, no chargeable event arises for them either at signing or when they vest the assets in the new recipient. If the assets have already been vested in the original beneficiary, there is equally no charge on that beneficiary when the deed takes effect.²

The practical point is the base cost that travels with the assets. The new beneficiary steps into the position the deceased’s will would have created, and their future CGT liability is calculated against probate value whenever they eventually sell.

The Two-Year Deadline

The deed must be executed within two years of the date of death. This is written into section 62(6) itself, and there is no mechanism for extending it.¹ It does not matter that probate has been delayed, that administration is still open, or that beneficiaries are still negotiating. The clock runs from the date of death.

Missing the window does not stop you from giving away inherited assets. It just means the transfer is treated as a disposal by you at market value, and you are personally liable for any CGT on the growth since the date of death. For residential property or shares that have risen sharply, the gap between doing this in time and doing it late can be tens of thousands of pounds.

What the Deed Must Contain

There is no standard HMRC form for the deed itself, though HMRC publishes a checklist (form IOV2) that sets out what they expect to see.³ Solicitors typically draft the document as a formal deed. For the CGT election to bite, it needs to include several essentials.

A statement by the persons making the variation that they intend section 62(6) to apply. This is the section 62(7) election. Without it, the reading-back does not operate, and this is the single most common point of failure.¹
Signatures of every beneficiary whose entitlement is being reduced or redirected. You cannot vary someone else’s share without their consent.
Clear identification of the assets being redirected, in enough detail that there is no ambiguity about what is moving and to whom.
Probate values for those assets, so the CGT base cost calculations line up with the figures already submitted to HMRC.
Full identification of the new recipients.

If you also want the variation to apply for inheritance tax, a separate election under section 142 of the Inheritance Tax Act 1984 is needed. You can elect for one tax and not the other.

The No-Consideration Rule

A deed of variation cannot be made in exchange for money or other consideration from outside the estate. If a beneficiary is paid to give up their share, the tax protections collapse. The one permitted form of “consideration” is another beneficiary agreeing to vary their own entitlement under the same estate. Swapping entitlements between beneficiaries within the estate is fine; taking cash from a third party to induce the variation is not.⁴

A side agreement where one family member compensates another for redirecting their inheritance looks like outside consideration, and HMRC can challenge it. If money needs to change hands to make an arrangement work, take specific legal advice before anyone signs.

What CGT Is Actually at Stake

From 6 April 2025, CGT is charged at 18% for basic rate taxpayers and 24% for higher or additional rate taxpayers on all asset types, including residential property.⁵ The annual exempt amount is £3,000 for individuals, which shelters very little.

A worked example makes the stakes concrete. A beneficiary inherits a property valued at £400,000 at the date of death. Eighteen months later it is worth £450,000, and they want to redirect it to a sibling. With a valid section 62(6) election, there is no disposal and no CGT. The sibling takes the property at £400,000 base cost and only faces CGT when they eventually sell. Without the election, the original beneficiary has made a disposal with a £50,000 gain. After the £3,000 annual exempt amount, a higher rate taxpayer would owe £11,280 in CGT on a transfer they treated as a simple family rearrangement.

Redirecting Assets Into a Trust

A deed of variation can redirect assets into a trust rather than to a named individual, and the reading-back still applies. The variation is not a disposal by the original beneficiary, and the trust acquires the assets at probate value, provided the section 62(7) statement is in the deed.

The ongoing position inside the trust is a separate question. Trusts pay CGT at their own rates, and the annual exempt amount for trustees is lower than for individuals. The election saves tax at the point of redirection; the trust structure creates its own tax profile from that point forward. Anyone considering this route should weigh the entry saving against the running cost of the trust.

Variations Involving Minors

If a minor’s entitlement is being reduced or removed by the variation, additional steps are needed. A child cannot consent to giving up their own inheritance, and a parent or guardian cannot simply sign against the child’s interests. Court approval under the Variation of Trusts Act 1958 is typically required before the deed can take effect. That process takes time, and the two-year deadline does not pause for it.

Where a minor is receiving assets rather than giving them up, no court approval is needed. The adults whose shares are being redirected sign the deed, and the child’s inheritance simply increases.

Do You Need to Notify HMRC

For CGT purposes, the election is self-executing. The section 62(7) statement in the deed is what activates the reading-back, not any separate notification. There is no requirement to send the deed to HMRC’s capital gains team for it to be effective.

The six-month notification rule people often hear about applies only to inheritance tax. If the variation results in more IHT being payable, a copy of the deed must be sent to HMRC within six months of execution.⁶ If the variation does not affect IHT, HMRC’s own checklist says you do not need to send a copy at all, though you should keep one with your records.³

Keep the deed with the permanent tax records regardless. The new beneficiary will need it to prove their base cost whenever they eventually dispose of the assets.

What Happens Without a Valid Election

If the deed lacks the section 62(7) statement, is signed after the two-year deadline, or involves outside consideration, the variation is treated as an ordinary lifetime gift from the original beneficiary. HMRC’s guidance treats the original beneficiary as having made a disposal at market value on the date of the deed.² Any gain between probate value and current market value is chargeable to CGT in that beneficiary’s hands.

The new recipient’s base cost then becomes market value at the date they received the assets, not probate value. That reshapes the entire CGT position going forward. If the original beneficiary has already used their £3,000 annual exempt amount on other disposals in the same tax year, the full gain is taxable at 18% or 24% depending on their income.⁵ The most frequent cause of failure is simply forgetting the election wording. Everything else about the deed can be right, but without that single statement, the CGT benefit is gone.

1
Legislation.gov.uk. Taxation of Chargeable Gains Act 1992 – Section 62
2
HM Revenue & Customs. Capital Gains Manual – CG31630 – Instruments of Variation: CGT Effects: If Conditions Satisfied
3
HM Revenue & Customs. Instrument of Variation Checklist – IOV2
4
HM Revenue & Customs. Shares and Assets Valuation Manual – SVM107140 – Capital Gains Procedures: Death and CG
5
GOV.UK. Capital Gains Tax: What You Pay It on, Rates and Allowances
6
GOV.UK. Change a Will After a Death