Clients should consider a number of lesser-known strategies to reduce their inheritance tax liability as they prepare for changes to IHT policy, says Rathbones.
The wealth manager said it had seen a surge in client queries about estate planning amid concerns of possible changes to the IHT regime in the forthcoming Autumn Budget.
It said an increasing number of its 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 the IHT scope from April 2027, as well as reforms to agricultural property relief and business relief.
Fresh speculation around further changes in the Autumn Budget has raised further questions from those tackling estate planning, the firm said.
Simon Bashorun, head of advice at Rathbones Private Office, said: “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 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%.
Rathbones said clients seeking to reduce their IHT liability should consider some of the ‘lesser-known’ approaches, including a deed of variation, which allows beneficiaries to redirect an inheritance within two years of death so it passes to others.
Bashorun said: “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.”
The firm says clients should also consider investing in AIM shares and business property relief investments.
Finally, Rathbones said making gifts out of surplus income remains an effective but underused way of reducing the IHT burden.
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Bashorun commented: “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.”
He added that substantial surplus income is also being 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.
