‘I’m a wealth expert – here are 4 lesser-known ways to reduce your inheritance tax bill’ | Personal Finance | Finance

Inheritance tax (IHT) planning has surged up the agenda for many families this year, with wealth managers reporting increased client concerns ahead of upcoming policy changes. Financial planners at Rathbones said questions about estate planning have jumped following recent shifts to IHT rules, including the inclusion of pensions in taxable estates from 2027, and reforms to agricultural and business relief.

However, Simon Bashorun, head of advice at Rathbones Private Office, warned families not to rush into sudden changes. He 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.”

Instead, he urged people to take a measured approach. Mr Bashorun said: “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.”

Both the main inheritance tax (IHT) nil-rate band, fixed at £325,000 since 2009, and the residence nil-rate band, set at £175,000, are currently frozen until 2030. As a result, an increasing number of estates are becoming liable for IHT or facing larger tax bills, even before considering the recent policy changes.

A Freedom of Information (FOI) request from Rathbones showed nearly one in 10 estates that paid IHT faced bills over £500,000. If current trends continue, more than 3,500 estates could pay that much by 2026.

While traditional strategies like trusts and lifetime gifts remain common, Mr Bashorun shared four “lesser-known” tips that can help reduce IHT liability.

Deed of variation

A deed of variation enables 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.

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

Qualifying shares on the Alternative Investment Market can become IHT-exempt after two years through Business Property Relief.

Mr Bashorun said: “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. 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 investments

Certain unlisted companies, AIM shares, and business assets may qualify for up to 100% IHT relief if held for at least two years and still owned at death.

Mr Bashorun said: “With the changes to AIM treatment, you might expect a shift into other BPR investments. 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.”

He warned: “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.”

Gifts out of surplus income

Regular gifts made from surplus income can be immediately exempt from IHT, without the usual seven-year rule, as long as they don’t reduce the giver’s standard of living.

Mr Bashorun said: “This exemption avoids the seven-year rule but remains underused, largely because many people are unaware of it.”

With pensions set to fall inside estates from 2027, attitudes are shifting. Mr Bashorun said: “Pension withdrawals can count as income, and while this may trigger income tax, paying 40% to 45% now can be preferable to a certain IHT charge later – especially if beneficiaries are higher-rate taxpayers themselves.”

According to Bashorun, families with substantial surplus income are already using it to fund discretionary trusts over time, avoiding large entry charges and moving wealth into a structure that offers “both protection and control for the family.”