What Is a Deed of Family Arrangement and How Does It Work?

A deed of family arrangement is a written agreement in which the beneficiaries of an estate agree to divide the inheritance differently from what the will directs or what the intestacy rules would produce. Signed within two years of the death and worded correctly, it is treated for inheritance tax and capital gains tax as though the deceased made the new distribution, so redirecting assets does not create a second tax charge. Solicitors often call the same document a deed of variation; the two terms mean the same thing, and the legislation itself uses neither, referring only to an “instrument in writing” that varies the dispositions of the estate.¹

Why Families Use One

Three situations drive most deeds. A will written years ago no longer fits the family’s circumstances, and the beneficiaries want to redirect assets to the people who actually need them. A dispute is brewing, and a negotiated redistribution is cheaper and quieter than litigation. Or the estate’s tax position can be improved by rerouting part of it, most often to a charity or to a younger generation. Because the law treats the revised distribution as the deceased’s own, the tax arithmetic can shift substantially without triggering a gift from one beneficiary to another.

The Four Conditions for Tax-Effective Treatment

Four things must all be true for the deed to attract the inheritance tax and capital gains tax reliefs. Miss one and the redistribution is still a binding contract between the parties, but the tax benefits fall away.

Every beneficiary whose entitlement changes must agree. One holdout stops the arrangement.²
The deed must be executed within two years of the date of death. The window cannot be extended.¹
No one may give up a share in return for money or anything of monetary value. One beneficiary voluntarily reducing their share so another receives more is fine; paying cash to secure a larger share disqualifies the deed from relief.¹
The deed must contain a written statement that the parties intend the relevant tax provisions to apply. Without it, HMRC will not recognise the variation for tax purposes, even if everything else is in order.³

Every party must also have full legal capacity, meaning at least eighteen years old and of sound mind. If a beneficiary is a minor or lacks mental capacity, court approval is required before the arrangement can take effect.²

How the Tax Treatment Works

The central benefit is a statutory fiction. Section 142 of the Inheritance Tax Act 1984 provides that where a valid variation is made within two years of death, the inheritance tax calculation is based on where the assets actually end up, not where the will originally sent them.¹ The redistribution is not a gift from one beneficiary to another, so no secondary inheritance tax charge arises. For this treatment to apply, the deed must include a statement referencing section 142(1) of the Act. For instruments executed on or after 1 August 2002 without that statement, HMRC treats the variation as ineffective for inheritance tax purposes, whatever the parties actually intended.³

A parallel mechanism applies to capital gains tax under section 62 of the Taxation of Chargeable Gains Act 1992. The variation is not treated as a disposal, and the person who ultimately receives the asset is treated as having acquired it at its market value on the date of death, not its value months or years later when the deed is signed.⁴ That prevents a capital gains charge from crystallising during the administration period. The relief needs its own statement, referencing section 62(6) of the 1992 Act.⁵ Most solicitors include a single clause covering both taxes, but you can elect for one without the other if the arithmetic favours doing so.

Redirecting Part of the Estate to Charity

Charitable redirection is one of the most tax-efficient uses of the deed. Because the law treats the variation as the deceased’s own disposition, a gift to charity through the deed qualifies for the same inheritance tax exemption that a charitable bequest in the will would have attracted. If the total amount redirected to charity reaches at least 10% of the net estate, the inheritance tax rate on the rest of the estate drops from 40% to 36%. On a large estate, that four-percentage-point reduction can produce savings that outweigh the sum given away. The usual conditions still apply: two years, unanimous consent among affected beneficiaries, and the statement of intent. The charity itself does not need to be a party.

Signing and Witnessing

The deed is executed when all affected beneficiaries sign. Each signature must be witnessed by someone who is not a party to the deed, and the witness must sign and give their full name and address legibly.⁶ A beneficiary’s spouse is not technically barred from witnessing, provided the spouse is not themselves a party, but using a genuinely independent witness is strongly advisable.

The executors or administrators do not always have to sign. They are required to join the deed only if the variation causes additional inheritance tax to become payable.¹ Even where they are not legally required, keeping the personal representatives informed and having them sign is good practice; they administer the estate and will need to action the revised distribution.

What the Deed Should Contain

The document itself is short, but precision matters. Banks and the Land Registry will reject vague descriptions, which can hold up the whole redistribution. At a minimum the deed should include:

The deceased’s full name, last known address, and exact date of death.
The source of entitlement: whether the estate is being distributed under a specific will (identified by date) or under intestacy, together with the date of the grant of probate or letters of administration.
The full legal name and current address of every party to the deed.
Asset descriptions specific enough for a bank or land registry to act on. For property, include the full address and title number; for bank accounts, include account numbers.
A clear statement of what each person was entitled to receive under the will or intestacy, and what they will receive instead under the deed.
The statement of intent, referencing section 142(1) of the Inheritance Tax Act 1984 and, if capital gains tax relief is wanted, section 62(6) of the Taxation of Chargeable Gains Act 1992.⁵

Where land is involved, the deed establishes the entitlement but a separate Land Registry transfer form is usually needed to change the registered title.

Telling HMRC

If the variation increases the amount of inheritance tax due, a copy of the deed must be sent to HMRC within six months of signing it.⁷ HMRC then reassesses the estate and issues a revised calculation. If the variation does not change the inheritance tax position, there is no obligation to notify HMRC; the original stays with the estate papers.

If the Estate Is in the United States

The term “deed of family arrangement” is a UK one. The closest US equivalent is a family settlement agreement, recognised in most states and enforceable as a contract where all interested parties consent. The tax picture is different: there is no US equivalent of section 142, and a voluntary redistribution among heirs can be treated as a taxable gift unless the agreement settles a genuine dispute and reflects the fair value of each party’s actual legal claim. Where a beneficiary simply wants to pass their share to the next person in line, a qualified disclaimer within nine months of death is often cleaner, but the disclaiming beneficiary cannot choose who receives the disclaimed share.

1
Legislation.gov.uk. Inheritance Tax Act 1984 – Section 142
2
Legal Services Commission of South Australia. Law Handbook – Deed of Family Arrangement
3
GOV.UK. Inheritance Tax Manual – IHTM35028
4
HM Revenue & Customs. Shares and Assets Valuation Manual – SVM107140
5
Legislation.gov.uk. Taxation of Chargeable Gains Act 1992 – Section 62
6
GOV.UK. Practice Guide 8 – Execution of Deeds
7
GOV.UK. Change a Will After a Death