Financial planners at Rathbones, have reported a surge in client queries about estate planning amid concerns of possible changes to the inheritance tax (IHT) regime in the forthcoming Budget – leading many to consider lesser-known strategies.
An increasing number of Rathbones clients were already reassessing how to manage the transfer of wealth to the next generation following changes announced last year, including the inclusion of pensions in IHT calculations from April 2027, as well as reforms to agricultural property relief and business relief. New speculation around the Autumn Budget has set in train a fresh wave of questions from those tackling estate planning.
Simon Bashorun, Head of Advice at Rathbones Private Office, says: “The freeze in IHT nil-rate bands has put families on a treadmill of rising inheritance tax liability, even before any further changes are made. While speculation around the Budget is understandable, making snap decisions can derail plans and prove costly.
“Regardless of what the future may bring, effective IHT planning starts with knowing what you can afford to give away. That requires a robust lifetime cashflow plan to assess your capacity to part with capital or income. From there, using current allowances and reliefs makes sense. Tailored financial advice is crucial to ensure the best strategy for individual circumstances.”
With the freeze on both the main IHT nil-rate band (unchanged since 2009) and the residence nil-rate band, more estates have become liable for IHT, or face higher tax bills, even before the latest policy changes are taken into account.
A recent Freedom of Information request by Rathbones revealed that nearly one in ten estates liable for IHT paid over £500,000 in the most recent year for which data is available. If the trend seen over the three years to April 2022 continues, Rathbones estimates that 3,524 estates will face IHT bills of more than £500,000 by the end of the 2025-26 tax year, based on an average annual increase of 8.74%.
While traditional strategies such as lifetime gifting and the use of trusts remain common, there is growing interest in lesser-known opportunities to reduce IHT liability.
Lesser-known ways to reduce IHT liability
Simon Bashorun explores some of the lesser-known ways to reduce IHT liability.
1. Deed of variation
What is it? A deed of variation allows beneficiaries to redirect an inheritance within two years of death so it passes to others (for example, children or into a trust), potentially reducing the estate’s IHT liability.
Simon Bashorun says: “We are seeing rising interest in how a deed of variation can be used to redirect an expected inheritance. The driver is often to ensure assets are passed on in a way that aligns with the family’s long term financial goals including potential IHT efficiencies – for example, by skipping a generation or placing the inheritance into a trust. This not only provides protection from IHT and greater control over the assets but can also give flexibility for the original beneficiary to access the funds if required.”
2. Investing in AIM shares
What is it? Qualifying shares listed on the Alternative Investment Market can become exempt from IHT after two years, thanks to Business Property Relief.
Simon Bashorun says: “With AIM down heavily from its 2021 peak, poor performance has dampened enthusiasm – a reminder of the volatility that comes with smaller company investing, and that the tax tail should not wag the investment dog.
“In addition, the IHT savings from such investments are due to be halved from 2026, leaving the market largely dormant. However, for clients with the right risk appetite, AIM portfolios can still offer partial IHT savings and may be attractive in the current environment.”
3. Business Property Relief (BPR) investments
What is it? Certain unlisted companies, AIM shares, and business assets can qualify for up to 100% IHT relief, provided they are held for at least two years and still owned at death.
Simon Bashorun says: “With the changes to AIM treatment, you might expect a shift into other BPR investments, particularly under £1 million. But uncertainty remains – both around how transfers from AIM into BPR products will be treated, and whether the Chancellor could revisit the imbalance created in the last Budget. For those with time and flexibility, a cautious ‘wait and see’ approach remains the most sensible course.
“AIM shares and Business Property Relief investments are considered high risk and may not be suitable for all investors – individuals should seek professional financial advice before making any investment decisions.”
4. Gifts out of surplus income
What is it? Regular gifts made from surplus income (rather than capital) can be immediately exempt from IHT, provided they do not reduce the giver’s standard of living.
Simon Bashorun says: “This exemption avoids the seven-year rule but remains underused, largely because many people are unaware of it. Historically, proving sufficient surplus income has been difficult, particularly where individuals relied on capital in retirement.
With pensions falling inside the estate from April 2027, attitudes are shifting. Pension withdrawals can count as income, and while this may trigger income tax, paying 40–45% now can be preferable to a certain IHT charge later – especially if beneficiaries are higher-rate taxpayers themselves.
We are also seeing substantial surplus income used to fund discretionary trusts over several years. This can avoid the entry charges that usually apply to large settlements, while moving wealth into a structure that offers both protection and control for the family.”
