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Advanced Taxation (UK) · Inheritance tax: the use of exemptions and reliefs in deferring and minimising inheritance tax liabilities

IHT Planning, Deeds of Variation and CGT Interaction

Updated 11 October 2026 · Fact-checked

IHT planning uses exemptions, reliefs, lifetime gifts, wills and deeds of variation to cut the tax on a person's wealth. You must always test the CGT side too. A gift can save IHT but trigger CGT, while death gives a CGT uplift. Compare total tax under each option and recommend one.

Understand IHT Planning, Variations and Interaction with CGT

IHT planning means arranging who owns what, and when, so less tax falls on the estate. The main tools are exempt transfers (spouse, charity, annual exemption), potentially exempt transfers (PETs) that drop out after seven years, business and agricultural property reliefs, and sensible use of the nil rate band and residence nil rate band. The tax tables give a nil rate band of £325,000, a residence nil rate band of £175,000, a lifetime rate of 20% and a death rate of 40%.

Every IHT decision has a CGT effect. A lifetime gift is a disposal at market value for CGT, even though no money changes hands. So a gift of an asset with a gain can create a CGT bill now. Gifts on death are different: the asset is not chargeable on death, and the beneficiary takes it at its probate value. This is the CGT uplift on death. It means gains are wiped out, but also losses are wasted.

Gift holdover relief can defer the CGT on a gift. It is available for gifts of business assets, and for gifts that are immediately chargeable to IHT, such as gifts into most trusts. The gain is deducted from the donee's base cost. It is not available for a PET of a non-business asset such as an investment property or quoted shares in a non-trading context. Business asset disposal relief (BADR) is different. It cuts the rate on qualifying gains to 14%, up to a lifetime limit of £1,000,000, but it applies to a sale, not to a holdover gift.

A deed of variation lets beneficiaries change who receives property after a death. It must be in writing, made within two years of death, and the beneficiary must not receive anything in return. If the deed includes the right statement, the change is read back for IHT as if the deceased had made it. Separately, for CGT it can also be read back, so the original beneficiary is not treated as disposing. The two elections are independent, and you must say which you want.

Good advice weighs IHT, CGT, income tax and cash flow together. Do not chase the IHT saving alone. Also think about control, the donor's needs, and the risk of dying within seven years.

Key rules to remember

IHT bands and rates
Nil rate band £325,000; residence nil rate band £175,000; lifetime rate 20%; death rate 40%
Tax is charged only on the excess over the available nil rate band. Use the tables given in the exam.
Taper relief on death within 7 years
3-4 years 20%; 4-5 years 40%; 5-6 years 60%; 6-7 years 80% reduction in the tax
It reduces the tax on the gift, not the value of the gift. It only helps if tax is actually payable after the nil rate band.
CGT rates and annual exempt amount
18% lower rate; 24% higher rate; annual exempt amount £3,000
Individuals' gains are taxed at 18% only to the extent basic rate band is unused, and 24% above that.
Business asset disposal relief
Qualifying gains taxed at 14%; lifetime limit £1,000,000
Applies to qualifying business disposals. It does not apply to a gift where holdover relief is claimed on the same gain.
Holdover relief effect
Donee's base cost = market value at gift − held-over gain
The donor has no chargeable gain on the held-over part. The donee's later gain is therefore larger.
Deed of variation conditions
In writing + within 2 years of death + no consideration + statement for read-back
IHT and CGT read-back are separate elections. Without the statement, the variation is a gift by the beneficiary.
CGT on death
No chargeable gain on death; beneficiary's base cost = probate value
Losses on assets held at death are lost, so consider selling loss-making assets in lifetime.

How to solve IHT Planning, Variations and Interaction with CGT questions

Use the same sequence for any planning question. It keeps IHT, CGT and the client's aims in view together.

  1. 1Read the client's objectives: reduce IHT, keep control, fund needs, benefit a named person. Note ages and health, because the seven-year clock matters.
  2. 2List the assets with their value, cost and type (business, agricultural, investment, home). Note which carry business property relief or an unrealised gain or loss.
  3. 3Work out the IHT position if nothing is done: estate value, available nil rate band and residence nil rate band, and 40% tax on the excess.
  4. 4Compute each alternative: gift now, gift by will, deed of variation, or a gift to a trust. For lifetime gifts, find the IHT in each of the cases (die within 7 years, die later, survive 7 years) and use taper relief where relevant.
  5. 5Compute the CGT for each alternative: disposal at market value, annual exempt amount, rate 18% or 24%, whether holdover or BADR applies, and whether death gives an uplift or wastes a loss.
  6. 6Add up total tax under each option, including the donee's later CGT where holdover has been claimed.
  7. 7Recommend the best option, state your assumptions, and mention non-tax risks and any further action such as making elections within time limits.
  8. 8Present the answer in the format asked for (letter, memo, report) and show professional skills: a clear structure, reasoned conclusion and appropriate caveats.

Quickest way: Three-column comparison

When to use it: Use this when you have to compare gift now, death transfer and variation in a short time.

  1. Draw three columns: IHT, CGT and net outcome for each option.
  2. Fill in IHT first, using the nil rate band once only, in date order.
  3. Fill in CGT: gain × 24% (or 18%, or 14% for BADR), after the £3,000 annual exempt amount, unless holdover or the death uplift removes it.
  4. Total each column, pick the lowest, and write two lines on risks such as dying within seven years or loss of control.

Common mistakes in IHT Planning, Variations and Interaction with CGT

  • Ignoring CGT when recommending a lifetime gift.

    The chapter is headed IHT, so students focus on the IHT saving only.

    Fix: Always ask whether the asset has a gain. A gift is a disposal at market value, so work out the CGT and check holdover relief.

  • Claiming holdover relief on a PET of an investment asset.

    Students remember that holdover exists but not its conditions.

    Fix: Holdover applies to business assets, and to gifts that are immediately chargeable to IHT. A PET of a non-business asset does not qualify.

  • Applying taper relief to the value of the gift, or using it when no tax is due.

    The word taper suggests the gift value shrinks.

    Fix: Taper reduces the tax. First use the nil rate band, then compute tax at 40%, then apply the percentage reduction.

  • Forgetting that gifts in the seven years before death use up the nil rate band first.

    Students treat the estate as if it had a fresh nil rate band.

    Fix: Set the nil rate band against the earliest gifts first. Only the unused part is available against the death estate.

  • Treating a deed of variation as valid without the conditions.

    Students remember the two-year period but forget the written statement and no-consideration rule.

    Fix: Check each condition. State that the deed must include the statement for IHT and, separately, for CGT if you want both read back.

  • Recommending a lifetime sale of an asset that will rise in value, or holding on to one with a loss, without considering the death uplift.

    Students forget that death wipes out gains and wastes losses.

    Fix: For a gain, holding to death can save CGT. For a loss, realise it in lifetime if the loss can be used.

Worked examples

Example 1

Mia inherited quoted shares from her mother. Probate value was £100,000, and they are now worth £130,000. Mia is a higher rate taxpayer with her annual exempt amount unused. She wants her daughter Zoe to have the shares. Mia is within the two-year period after the death. Advise on the CGT effect of a deed of variation compared with a straight gift.

Show the solution
  1. Straight gift: Mia disposes at market value of £130,000 and the base cost is £100,000, so the gain is £30,000.
  2. Deduct the annual exempt amount of £3,000, leaving £27,000 taxable. Mia is a higher rate taxpayer, so the rate is 24%.
  3. CGT = £27,000 × 24% = £6,480. For IHT, the gift is a PET by Mia, so it is at risk for seven years.
  4. Deed of variation with the statement for CGT and IHT: for CGT, Mia is not treated as disposing. Zoe is treated as acquiring the shares from Mia's mother at the probate value of £100,000, so there is no CGT now.
  5. For IHT, the transfer is read back as made by Mia's mother. It is not a PET by Mia, so it does not use her annual exemption and does not risk her nil rate band.
  6. Zoe's base cost is £100,000. The £30,000 gain is not lost, but it is deferred to her own later sale.

Answer: A straight gift gives CGT of £6,480 and a seven-year PET risk for Mia. A deed of variation, signed within two years, in writing, with no consideration and the correct statements, gives no CGT now and no PET by Mia. Zoe takes a base cost of £100,000.

Example 2

Harold, a widower, owns an investment property worth £600,000, which cost £200,000. His other assets are £400,000. He wants to give the property to his daughter. He is a higher rate taxpayer with his annual exempt amount available. Assume he has made no earlier gifts, no annual exemptions apply to the gift, and there is no residence nil rate band. Compare: (a) keep the property until death, (b) gift now and die after 5½ years, (c) gift now and survive 7 years. Ignore the nil rate band changes over time.

Show the solution
  1. (a) Keep: estate £1,000,000. IHT = (£1,000,000 − £325,000) × 40% = £675,000 × 40% = £270,000. No CGT, as death gives an uplift. Total £270,000.
  2. Gift now: it is a disposal at market value of £600,000, a gain of £400,000. The property is not a business asset and the gift is a PET, so holdover relief is not available.
  3. CGT: £400,000 − £3,000 = £397,000 × 24% = £95,280.
  4. (b) Die after 5½ years: the PET uses the nil rate band first. Tax = (£600,000 − £325,000) × 40% = £275,000 × 40% = £110,000. Taper relief for more than 5 but less than 6 years is 60%, so tax = £110,000 × 40% = £44,000.
  5. The nil rate band is already used, so the estate of £400,000 bears £400,000 × 40% = £160,000. IHT is £44,000 + £160,000 = £204,000. Add CGT £95,280 = £299,280.
  6. (c) Survive 7 years: the PET is exempt. The estate of £400,000 has the full nil rate band. Tax = (£400,000 − £325,000) × 40% = £75,000 × 40% = £30,000. Add CGT £95,280 = £125,280.

Answer: Keeping the property costs £270,000 in total. Giving it away costs £299,280 if Harold dies after 5½ years, which is worse than keeping it, and £125,280 if he survives seven years. The gift saves tax only if he lives for seven years, and it costs £95,280 of CGT immediately. The daughter also takes a base cost of £600,000 rather than the probate uplift. Recommend the gift only if Harold is in good health, and consider other options, such as gifts of cash or business assets, where holdover relief is available.

Exam tips

  • Always set out the three outcomes for a lifetime gift: death within seven years with taper, death after taper starts but with the nil rate band used, and survival to seven years.
  • State the type of asset before choosing a relief. Holdover for a PET needs a business asset, while a CLT into a trust can qualify for any asset.
  • For deeds of variation, list the conditions and name both elections. Marks are given for the two-year limit, the written statement and no consideration.
  • Compare total tax across options, not just IHT. A tidy table with a conclusion gets professional skills marks.
  • Mention non-tax factors briefly, such as loss of control, the donor's needs and the donee's ability to pay any tax.

Practice questions from Inheritance tax: the use of exemptions and reliefs in deferring and minimising inheritance tax liabilities

IHT Planning, Variations and Interaction with CGT in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

IHT Planning, Variations and Interaction with CGT: frequently asked questions

Does a deed of variation use the beneficiary's annual exemption or create a PET?

No, if the deed is made within two years of death, in writing, with no consideration, and includes the statement for IHT. The change is read back as if the deceased made it. So it is not a PET by the beneficiary.

When can I claim gift holdover relief?

It is available for gifts of business assets and for gifts that are immediately chargeable to IHT, such as many gifts into trusts. It is not available for a PET of an investment asset. The donor and donee must claim together.

Is it better to give an asset away or leave it on death?

It depends on the numbers. A gift can save IHT if the donor survives seven years, but it can trigger CGT now. On death, the beneficiary gets an uplift to probate value, so the gain is wiped out. Compare total tax under both.

Can I use business asset disposal relief on a gift?

BADR reduces the CGT rate on a qualifying disposal, to 14% up to a £1,000,000 lifetime limit. If a gift qualifies for both holdover and BADR, think carefully, because holdover defers the gain while BADR taxes it at the lower rate now.