Using a deed of variation to maximise IHT reliefs and exemptions

Within the inheritance tax (IHT) regime there are various reliefs and exemptions available which, when relevant, can reduce the amount of IHT payable on a deceased’s estate.  However, there are some complicated interactions between these reliefs and exemptions which can result in the reliefs being lost and more IHT than expected becoming payable.

We acted for an executor of his aunt’s estate.  He was also the residuary beneficiary . His aunt had a substantial estate and was generous to her chosen charities. Under the terms of the deceased’s will, she left legacies worth over £1 million to those charities.

The deceased’s estate was made up of various types of assets but included a portfolio of over £1 million invested in the alternative investment market (AIM). At the time of the deceased’s death, these shares were eligible for business relief at 100%.

The executor was pleased that the value of his aunt’s estate would benefit from both business relief (BR) (over £1 million) and charitable exemption (over £1 million), significantly reducing the value of his aunt’s estate that would be subject to IHT.

Unfortunately, as there had not been a specific gift in the will of the AIM shares, the effect was that the valuable reliefs were not as great as he hoped. Due to the interaction rules set out in the Inheritance Tax Act 1984, the BR was partly lost as the relief was apportioned between the charitable gifts and the non-charitable residuary gift. This amounted in far more IHT than expected.

But all was not lost, we suggested to the residuary beneficiary that he may wish to enter into a deed of variation to re-arrange the effect of his aunt’s will. We advised on the deed of variation, whereby the AIM shares, instead of falling into the residuary estate, were instead gifted by way of a specific gift to a discretionary trust. The original beneficiary was able to be a beneficiary of this trust, along with other members of his family, and so he could potentially still benefit from the value of this portfolio. However, by making the AIM shares the subject of a specific gift meant that the value of their relief was not apportioned across the gift to the charities.

The result of this was that the BR claim was allowed in full by HMRC, alongside the full charitable exemption claim resulting in saving the estate a very significant sum in IHT.

A further benefit to the original beneficiary is that now that the value of the AIM shares is in a discretionary trust, this value would not amalgamate with the value of his estate on his death and so will not be subject to IHT at that time, although the trust does have its own IHT regime.

In this case, the assets eligible for BR were AIM shares but the principle is the same if the deceased had instead owned agricultural or business assets that attracted agricultural or business relief.

Whilst the changes announced by the government, and coming into effect from April 2026, will mean that the 100% relief available on AIM shares will be restricted to 50% (and there will be a £1 million cap on fully relievable agricultural or business assets after which they also will be subject to 50% relief) this is still a valuable relief and so worthwhile considering when someone is creating their will or looking to reorganise an estate on death.

We have extensive experience of advising on IHT reliefs and exemptions. Get in touch if we can help you.