With financial planners at UK wealth manager Rathbones reporting a surge in client queries about estate planning, the firm explores alternative ways of reducing inheritance tax liability. 

Amid concerns of possible changes to the inheritance tax (IHT) regime in the Autumn Budget, Simon Bashorun, head of advice at UK wealth manager Rathbones Private Office, examines some of the lesser-known ways of reducing inheritance IHT liability. 

Bashorun said that an increasing number of Rathbones clients were already reassessing how to manage the transfer of wealth to the next generation after changes were announced last year, among them 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.  

The current IHT allowance, which has been frozen at £325,000 ($440,000) for 16 years, will remain frozen for another five years until 2030, making more people liable to paying IHT. The £175,000 residence nil rate band hasn’t changed since 2020. One consideration for the Autumn Budget is abolishing the “seven-year rule” which enables gifts to be exempt from IHT seven years before someone dies. This would squeeze the wealth of the UK’s middle class still further, who are already being hit by the freeze in IHT thresholds at £325,000. There have also been suggestions of taxes on property transactions and an annual property tax on high-value homes.

“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,” Bashorun said. “While speculation around the Budget is understandable, making snap decisions can derail plans and prove costly.” 

A recent Freedom of Information request by Rathbones showed that nearly one in 10 estates were liable for IHT paid over £500,000 in the most recent year for which data was 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 per cent. 

“Regardless of what the future may bring, effective IHT planning starts with knowing what you can afford to give away,” Bashorun continued. “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.” 

While traditional strategies such as lifetime gifting and using trusts remain common, Bashorun suggests some of the lesser-known ways for reducing IHT liability where there is growing interest:

Deed of variation 
What is it? A deed of variation allows beneficiaries to redirect an inheritance within two years of death so that it passes to others (for example, children or into a trust), potentially reducing the estate’s IHT liability. 

“We are seeing rising interest in how a deed of variation can be used to redirect an expected inheritance,” Bashorun said. “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.” 

Investing in AIM shares 
What are they? Qualifying shares listed on the Alternative Investment Market (AIM) can become exempt from IHT after two years, thanks to Business Property Relief. 

“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,” Bashorun continued. “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.” 

Business Property Relief (BPR) investments 
What is it? Certain unlisted companies, AIM shares, and business assets can qualify for up to 100 per cent IHT relief, provided that they are held for at least two years and still owned at death. 

“With the changes to AIM treatment, you might expect a shift into other BPR investments, particularly under £1 million,” Bashorun said. “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,” Bashorun added.

Gifts out of surplus income 
What are they? Regular gifts made from surplus income (rather than capital) can be immediately exempt from IHT, provided that they do not reduce the giver’s standard of living. 

“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,” Bashorun said. “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 to 45 per cent 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,” Bashorun added. See more here about IHT.