How to Avoid Paying Too Much Inheritance Tax in 2026

Why inheritance tax is a growing problem for London homeowners

Inheritance tax (IHT) is charged at 40% on the value of your estate above your available nil-rate bands. With London property prices averaging well over £500,000, many homeowners find their estates are worth significantly more than the £325,000 standard threshold — or even the £500,000 threshold available to those leaving their home to direct descendants.

The freezing of IHT thresholds until at least 2028 means that as property values continue to rise, more and more families will pay IHT on estates that were never intended to be taxed. HMRC collected a record £8.2 billion in 2024/25 — nearly double what was collected a decade ago.

Understanding the thresholds: how much can you pass on tax-free?

Every individual has a nil-rate band of £325,000 — the amount they can pass on free of IHT. Married couples and civil partners can transfer any unused nil-rate band to the survivor, potentially doubling the threshold to £650,000.

If you leave your main home to your children or grandchildren, you can also claim the residence nil-rate band (RNRB) of £175,000 per person. For a married couple, this can bring the combined threshold to £1,000,000. However, the RNRB tapers away for estates worth more than £2 million — a threshold many prime London properties approach.

Strategy 1: Write your life insurance in trust (the easiest win)

This is the single most impactful step most London homeowners can take — and it is completely free. Life insurance paid directly into your estate is counted as part of your estate and may be subject to 40% IHT. Written in trust, it passes directly to your beneficiaries outside your estate — no IHT, no probate, payout in days not months.

Consider a single London homeowner with a £650,000 property, £400,000 life insurance policy (not in trust), and £80,000 in savings. Their estate totals £1,130,000. After their £500,000 threshold, they have a taxable estate of £630,000 and an IHT bill of £252,000. Simply writing the life insurance in trust removes it from the estate, reducing the IHT bill to £92,000 — a saving of £160,000.

We set up life insurance trusts as part of every policy application, at no charge. It takes approximately 30 minutes.

Strategy 2: Use your annual gift allowances

HMRC allows you to give away £3,000 per year free of IHT — your annual exemption. Any unused allowance can be carried forward one year, allowing a maximum £6,000 gift in one year. You can also give up to £250 per year to any number of individuals (small gift exemption), and pay for anyone's wedding gift up to £5,000 for a child, £2,500 for a grandchild, or £1,000 for anyone else.

Regular gifts from surplus income are also exempt from IHT — with no limit — provided they come from income rather than capital and do not reduce your standard of living. This can be a very effective way to reduce a large estate over time.

Strategy 3: The 7-year gifting rule

Gifts above the annual exemption to individuals become IHT-free if you survive 7 years after making them (potentially exempt transfers, or PETs). If you die within 7 years, IHT is tapered: 40% within 3 years, 32% at 3–4 years, 24% at 4–5 years, 16% at 5–6 years, 8% at 6–7 years. This rule is particularly useful for larger gifts to adult children.

Gifts into trust are chargeable lifetime transfers and have a £325,000 lifetime limit before IHT applies at the time of the gift (usually at 20% in trust, with a further potential 40% charge if you die within 7 years). Keep detailed records of all gifts and get professional advice before making significant transfers.

Strategy 4: Maximise the residence nil-rate band

Many families fail to claim the full residence nil-rate band because their wills were not drafted to maximise it. To claim the RNRB, your property must be left to direct descendants — children, stepchildren, grandchildren — either outright or via certain trust structures.

If your will leaves everything to your spouse first and then to children on second death, the full RNRB (£350,000 for a couple) should be available. However, more complex will structures — such as discretionary trusts or life interest trusts — may not qualify unless carefully drafted. Have your will reviewed by a solicitor if your estate is likely to be subject to IHT.

Strategy 5: Leave money to charity

Charitable legacies are completely free of IHT. Better still, if at least 10% of your net estate (after deducting nil-rate bands and other reliefs) passes to charity, the IHT rate on the rest of your estate falls from 40% to 36%. This can make a charitable gift effectively 'free' in certain circumstances — the tax saving partially offsets the gift.

Strategy 6: Consider a discretionary trust

Assets placed in a discretionary trust are managed by trustees for named beneficiaries. Provided you survive 7 years after creating the trust, the assets are outside your estate for IHT. Trusts have their own tax regime — including 10-yearly charges and exit charges — so they are not always the most tax-efficient option. However, for life insurance policies and certain investments, a discretionary trust can be highly effective.

Property trusts — particularly Family Protection Trusts and Protective Property Trusts — are sometimes marketed as IHT planning tools. These require careful professional advice. We can advise on life insurance in trust; for property trusts and broader estate planning, please speak to a qualified solicitor.