How families are saving six figures thanks to an inheritance tax trick

A deed of variation might be the estate planning tool you need if you're willing to forego a generation in order to save thousands on inheritance tax

Since chancellor Rachel Reeves' inheritance tax crackdown, financial advisers say they are taking advantage of a little-known inheritance tax loophole that is helping families save a lot of money on their IHT bills.

Concerns over potential additional changes to the inheritance tax (IHT) regime in the upcoming Budget, where reports indicate Reeves is considering tightening the rules on lifetime gifting, have led to a spike in inquiries about estate planning, according to financial advisers.

Almost one in ten estates subject to inheritance tax paid more than £500,000 in the most recent year (2021/22) for which data is available, according to a recent Freedom of Information request made by wealth manager Rathbones.

By the end of the 2025 - 2026 tax year, 3,524 estates will have IHT bills of over 500,000, according to Rathbones, if the trend observed over the three years ending in April 2022 continues. This is based on an average annual increase in tax revenue of 8.74 percent.

Families will be impacted by new pension inheritance tax regulations that include unused retirement funds in inheritance tax calculations starting in April 2027, as the chancellor works to increase funding for vital public services.

In light of this, there is increasing interest in lesser-known ways to lower inheritance tax bills, even though conventional methods like lifetime gifting and the use of trusts to avoid inheritance tax are still popular. The act of variation is one of them.

What is meant by a deed of variation?

Within two years of death, beneficiaries can reroute all or part of an inheritance through a deed of variation, potentially lowering the estate's IHT liability and transferring it to other beneficiaries (such as children or a trust).

The head of advice at Rathbones Private Office, Simon Bashorun, stated: "There is a growing interest in the use of a deed of variation to reroute an anticipated inheritance.

By omitting a generation or transferring the inheritance into a trust, for instance, the driver is frequently to make sure assets are transferred in a manner that supports the family's long-term financial objectives, including possible IHT efficiencies.

"This can allow the original beneficiary to have flexibility in accessing the funds if needed, in addition to offering protection against IHT and increased control over the assets.

What is involved in a deed of variation?

If a deed of variation is executed within two years of the deceased's passing, beneficiaries may change the terms of a will and the distribution of an estate. Any redirected gift is treated by HMRC as though it were given by the deceased, which may lessen inheritance tax obligations.

As an illustration, Rebecca Williams, divisional lead of financial planning at Rathbones, said, "Suppose a child inherits more than they require. To transfer assets straight to their own children, they may use a deed of variation. This can lower future IHT bills and skip a generation.

Although there are no immediate inheritance tax savings when a child's beneficiary is changed to a grandchild, doing so may save 40% on the child's eventual death by skipping a generation, meaning that the grandchild will only pay IHT once rather than twice.

Giving money to charity is an additional choice that can lower the estate's taxable value and lower the IHT rate from 40% to 36%, as long as at least 10% of the estate is donated.

Assets can also be placed into a trust using a deed of variation. "When children or grandchildren are too young to inherit, or when a beneficiary wants to keep assets outside their personal estate for asset protection or tax planning purposes, this is especially helpful," Williams said.

It may also be used to benefit a stepchild or to include a child or grandchild who was not named in the will, possibly because they were born after it was written.

The changes under the deed of variation, however, require the consent of all impacted beneficiaries. "The most important thing is that there must be unanimous agreement, which can be difficult when money is involved," Williams said, adding that expert counsel is necessary to guarantee the procedure is done correctly.

Therefore, if any beneficiary is younger than eighteen, a deed of variation cannot be used because they are not legally able to consent to the variation. A deed of variation, however, can be an effective tool to omit a generation or to include people not listed in the original will if all beneficiaries are adults and agree.

What is the amount of inheritance tax that a deed of variation can save me?

Director Scott Gallacher of the financial advising firm Rowley Turton stated that he is currently talking about deeds of variation "with almost every client we see, as the number of families facing inheritance tax on their estates is dramatically increasing due to the government's new IHT raid on pensions."

"This strategy is often generating six-figure IHT savings, in addition to offering significant defense against divorce settlements and long-term care costs for future generations," he stated.

He urged families to immediately start talking about deeds of variation. However, he said it's not an easy task, as some parents have threatened to deny their children inheritance if they bring up the subject.

"In practice, these discussions can be difficult," he stated.

Mather and Murray Financial's independent financial adviser, Samuel Mather-Holgate, echoed the same sentiment.

"Even before the IHT changes, these deeds were underutilized, but the proposed super tax is bound to get people to consider things they currently hadn't," he said.

"Compound interest and pound cost averaging are frequently mentioned by financial planners, but IHT payable generation on generations is the opposite of compound interest and pound cost averaging.