In cross-border inheritance cases, particularly those involving the United Kingdom and Spain, it is quite common for the initial distribution of the estate not to be the most suitable one, either from a family or a tax perspective. In this context, a Deed of Variation in Spain can be a highly effective tool, as it allows the redistribution of an estate from the outset and avoids later solutions that may be more complex or tax-inefficient.
What is a Deed of Variation?
A Deed of Variation is an instrument under English law that allows the beneficiaries of an estate to modify its distribution after death, provided that it is carried out within a certain timeframe, generally within two years from the date of death.
What makes this instrument particularly powerful is how it is treated legally and fiscally. Under English law, this is not regarded as a renunciation or a transfer between beneficiaries. Instead, it is treated as a rearrangement of the estate that is considered to have been made by the deceased themselves.
In other words, for legal and tax purposes, it is as if the will had originally provided for that revised distribution.
This feature is precisely what makes the Deed of Variation especially useful in international contexts.
Can a Deed of Variation be used in Spain?
Yes, but subject to one key condition: the Deed of Variation must be valid under the law governing the succession, which in many cases will be English law.
The Spanish General Directorate of Taxes has recently confirmed this approach, stating that if the Deed of Variation complies with English law, its effects must be respected in Spain. This means that each beneficiary is taxed only on what they actually receive after the redistribution, and not on what they were initially entitled to under the will.
In practical terms, the modification is not treated as a subsequent transaction between beneficiaries, but as part of the succession itself.
How it is implemented when Spanish assets are involved?
Although the Deed of Variation is an English legal instrument, when the estate includes assets located in Spain, such as real estate, an additional step is required.
First, the Deed of Variation is executed in the United Kingdom, modifying the distribution of the estate. For example, it may provide that the surviving spouse receives a life interest in the property, while another beneficiary receives the underlying ownership (remainder).
Secondly, a Spanish deed of inheritance is executed. In this document, the arrangement is adapted to Spanish law. Typically, this means granting a lifetime usufruct in favour of the spouse and bare ownership in favour of the other beneficiary.
It is important to note that Spanish law does not recognise English legal concepts as such. Instead, their functional equivalent must be used. This adaptation is essential in order for the arrangement to be valid and registrable in the Spanish Land Registry.
Important:
A Deed of Variation in Spain is not an automatic solution. To achieve the intended tax effects, it must be valid under the law governing the succession and correctly adapted to the Spanish legal, tax and Land Registry system.
Tax implications of a Deed of Variation.
The main benefit of the Deed of Variation lies in its tax treatment. Since the redistribution is considered to form part of the succession, each beneficiary is taxed only on what they ultimately receive. There is no subsequent transfer between beneficiaries, and no reclassification as a gift.
This allows the avoidance of common scenarios in which an initial inheritance is followed by a second transfer, often subject to a significantly higher tax burden.
A typical example involves a surviving spouse and a child (or stepchild) inheriting jointly. Without proper planning, the death of the spouse may trigger a second inheritance with a much higher tax cost. However, if the structure is correctly established from the outset through a Deed of Variation, this second transfer is effectively eliminated.
When the spouse later passes away, their right, for example a usufruct, simply comes to an end, and full ownership automatically consolidates in the hands of the other beneficiary, without any new inheritance arising between them.
Coordination between UK and Spanish advisers.
The Deed of Variation is not a standard or automatic solution. For it to work correctly, careful coordination is required between UK and Spanish advisors.
The document must be properly drafted under English law, and its implementation in Spain must be carefully adapted to Spanish legal and registral requirements. In addition, consistency must be maintained across all documentation and tax filings.
When implemented correctly, the result is a robust and efficient structure, fully defensible from both a legal and tax perspective.
Conclusion: international inheritance planning.
The Deed of Variation offers something that few tools can provide: the ability to reshape the distribution of an estate from the outset, with full legal and tax effect in both the United Kingdom and Spain.
Rather than relying on later adjustments, which are often more complex, costly, and potentially questionable, it allows the appropriate structure to be put in place from the beginning, avoiding future problems and optimising the tax position.
In an increasingly international environment, understanding and properly applying this type of instrument can make a significant difference to the outcome of an inheritance.
ÁLVARO MORALES SOUSA
PARTNER – LAWYER
CUSTOM REPRESENTATIVE
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