If you’ve worked hard to accumulate wealth over your lifetime, you’ll likely want to ensure that your loved ones receive as much of your estate as possible when the time comes.
However, without careful financial planning, your beneficiaries could lose a significant portion of their inheritance to taxes – the standard rate of Inheritance Tax (IHT) is 40% (2025/26).
Moreover, HMRC figures published by Today’s Wills and Probate, reveal that IHT receipts for April 2024 to February 2025 hit a new record of £7.6 billion. This is 0.8 billion higher than the same period last year.
This increase is partly due to the ongoing freeze on IHT thresholds, which set a limit on the amount you can pass on without incurring IHT.
The nil-rate band, which allows you to pass on up to £325,000 without your beneficiaries incurring IHT, has not risen with inflation since 2009, and the chancellor has extended this freeze until at least 2030.
So, as the value of assets increases over time, more estates exceed the threshold and become liable to IHT or pay more tax than they might have if the band had risen in line with inflation.
If you’re concerned about the IHT liabilities of your estate, here are three lesser-known strategies for mitigating your liabilities and protecting your loved ones’ inheritance.
1. Using a deed of variation
If you receive an inheritance when you’re already financially secure and prepared for the future, you may wish to pass this wealth on to the next generation.
As such, a deed of variation could be a useful financial planning tool.
This legal document allows you to redirect some or all of your inheritance to your children or other chosen beneficiaries, provided that you do so within two years of the person’s death.
While there may be IHT to pay if the deceased’s estate exceeds the IHT thresholds, the inheritance is no longer part of your estate for IHT purposes. As a result, a deed of variation could reduce your future IHT liability.
What’s more, HMRC will treat any gift you make under a deed of variation as though it came from the deceased (rather than you as the beneficiary). This means if you pass away within seven years of redirecting your inheritance, this usually won’t trigger an IHT charge (as it might do if the gift had come directly from you).
2. Gifting from surplus income
There are various gifting exemptions that allow you to pass on some of your wealth during your lifetime, without incurring IHT.
For example, each year you can use your annual gifting exemption to pass on up to £3,000 (2025/26) without this being added to the value of your estate for IHT purposes. This exemption applies to gifts from capital, such as your savings, investments, or pension.
In addition to the annual exemption, the lesser-known “gifts out of surplus income” rule could be especially useful, as theoretically, it allows you to pass on unlimited wealth IHT-free. However, research published by FTAdviser has revealed that over the past three years, only 2% of estates used the gifts out of surplus income exemption.
If you want to take advantage of this useful exemption, you must meet the following criteria:
- Gifts must be made out of your income, rather than capital assets
- Gifts must be paid on a regular basis as part of “normal expenditure”
- Making these gifts should not diminish your current standard of living.
You’ll need to keep careful records of any gifts you make under this rule as the executors of your will must submit a claim to use the gifts out of surplus income exemption.
Read more: Only 430 people used this valuable Inheritance Tax exemption this year – did you?
3. Claiming share loss relief
In general, IHT is calculated based on the value of assets on the date of death. So, if you inherit investments, such as shares, which subsequently drop in value, the estate still pays tax on the original valuation.
That’s where “share loss relief” can come in useful, as it allows executors to reclaim some of the IHT already paid if they sell qualifying investments at a loss within 12 months of the date of death.
Qualifying investments include:
- Shares listed on recognised stock exchanges, such as the London Stock Exchange
- Open-ended investment companies (OEICs)
- Holdings in authorised unit trusts.
If you’re the executor, you must make your claim within five years of the date of death by submitting an IHT35 form.
You will also need to weigh up the relative merits of claiming Capital Gains Tax (CGT) or IHT share loss relief, as there is no double relief. As such, they will need to decide whether to:
- Transfer the investments to the beneficiaries – If the beneficiaries then sell the investments, they could offset any losses to reduce CGT, potentially saving 18% to 24%.
- Sell the investments during administration – Then claim share loss relief, which could save 40% (the standard IHT rate in 2025/26).
As you can see, in most cases, claiming IHT share loss relief is more valuable than CGT relief.
However, it’s crucial that you seek financial advice about how to balance IHT and CGT liabilities, as this can be complicated if large or complex portfolios are involved.
Get in touch
If you’re worried about your loved ones losing some of their inheritance to tax, we can help you review your assets and put effective strategies in place to mitigate a potential IHT bill.
If you’d like to learn more about working with us, please email hello@sovereign-ifa.co.uk or call us on 01454 416653.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, tax planning, or will writing.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.
Taper relief does not reduce the value transferred; it reduces the tax payable as a consequence of that transfer.
Approved by Best Practice IFA Group Ltd on 14/07/2025