Inheritance Tax Planning 2026

How to avoid paying too muchinheritance tax

HMRC collected a record £8.2 billion in inheritance tax in 2024/25. With London property prices, many families pay far more than necessary. Here is a plain-English guide to every legal strategy available — and which ones we can help you with directly.

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How inheritance tax works in 2026

Inheritance tax is 40% on the value of your estate above your available threshold. Understanding the rules is the first step to reducing your bill.

£325,000

Standard nil-rate band

Per person

£175,000

Residence nil-rate band

Per person (home to children)

£1,000,000

Married couple combined

Both allowances transferred

40%

IHT rate above threshold

36% if 10%+ goes to charity

⚠️ Example: Typical London homeowner without planning

Estate value:

  • London property£650,000
  • Life insurance (not in trust)£400,000
  • Savings & ISAs£80,000
  • Total estate£1,130,000

IHT calculation (single person):

  • Nil-rate band−£325,000
  • Residence nil-rate band−£175,000
  • Taxable estate£630,000
  • IHT bill @ 40%£252,000

✅ Same person — with life insurance written in trust

Estate value (life insurance removed):

  • London property£650,000
  • Life insurance (in trust — outside estate)£0
  • Savings & ISAs£80,000
  • Taxable estate£730,000

IHT calculation:

  • Nil-rate band−£325,000
  • Residence nil-rate band−£175,000
  • Taxable amount£230,000
  • IHT bill @ 40%£92,000

Saving: £160,000 — by simply writing the policy in trust. Free. 30 minutes.

6 legal ways to reduce your inheritance tax bill

Ranked by impact. Items marked "We can help" can be arranged directly — no solicitor needed.

1

Write your life insurance in trust

We can help with this
Impact: HighCost: Free

Life insurance paid into your estate is subject to IHT. Written in trust, it passes directly to beneficiaries — outside your estate, no IHT, no probate. A £500,000 policy could save your family £200,000 in tax. Takes 30 minutes, completely free.

Set up life insurance in trust →
2

Use your annual gift allowances

DIY
Impact: MediumCost: Free

You can give away £3,000 per year free of IHT (annual exemption). Unused allowance carries forward one year. You can also give unlimited amounts from regular surplus income if it does not affect your standard of living. Small regular gifts to family can reduce your estate significantly over time.

3

Use the 7-year gifting rule

Specialist advice recommended
Impact: HighCost: Free (if planned carefully)

Large gifts become IHT-free if you survive 7 years after making them. Gifts are tapered from years 3–7. This requires careful planning — you must be able to afford to give away the asset and continue living comfortably. Document all gifts carefully.

4

Maximise the residence nil-rate band

Solicitor required for wills
Impact: High — £175k per personCost: Cost of will drafting

The residence nil-rate band (RNRB) adds £175,000 to your threshold if your main home passes to direct descendants. A married couple can transfer unused RNRB between them, giving £350,000 additional allowance. Your will must be drafted correctly to claim this — see a solicitor.

5

Place assets in a discretionary trust

Solicitor required
Impact: High — removes assets from estateCost: Legal fees

Assets placed in a discretionary trust are potentially outside your estate after 7 years (subject to the 7-year rule). Trustees manage the assets for the benefit of named beneficiaries. Commonly used for life insurance, investments, and sometimes property. Requires a specialist solicitor.

Learn about trusts →
6

Donate to charity

DIY
Impact: Reduces taxable estate + lower rateCost: Free

Charitable legacies are free of IHT. If you leave at least 10% of your net estate to charity, the IHT rate on the remainder drops from 40% to 36%. This can be a tax-efficient way to support causes you care about while reducing the IHT burden on your family.

Why IHT planning matters more than ever for London homeowners

£8.2bn

IHT collected by HMRC in 2024/25 — a record high

Source: HMRC statistics

1 in 25

UK estates now pay IHT — up from 1 in 50 a decade ago

Source: HMRC estates statistics

£500k+

Average London property price — pushing many estates above thresholds

Source: Land Registry 2025

What we can and cannot help with

We can help directly

  • Writing your life insurance policy in trust (free)
  • Arranging the right level of life insurance for your estate
  • Critical illness cover and income protection
  • Reviewing your existing policies and trust arrangements
  • Referring you to trusted solicitors for estate planning

Refer to a specialist

  • Property trusts and Family Protection Trusts
  • Wills and estate planning documents
  • Complex gifting strategies and documentation
  • Business Property Relief and Agricultural Relief
  • Powers of attorney and care planning
Important: Inheritance tax planning is complex and rules change frequently. This guide is for general information only and does not constitute tax or legal advice. For personalised IHT planning, including wills, property trusts, and gifting strategies, please consult a qualified solicitor or regulated financial planner. Mortgage International can advise on and arrange life insurance in trust, which is one of the most effective IHT planning tools available.

Inheritance tax FAQs

What is the inheritance tax threshold in 2026?
The standard nil-rate band is £325,000. A married couple or civil partners can combine allowances, giving a potential £650,000 threshold between them. If the family home is left to direct descendants, the residence nil-rate band adds a further £175,000 per person (£350,000 for a couple) — bringing the combined threshold to £1,000,000 for married couples passing their home to children or grandchildren.
What is the inheritance tax rate in the UK?
Inheritance tax is charged at 40% on the value of an estate above the available nil-rate bands. So if your estate is worth £700,000 and your threshold is £500,000, the taxable amount is £200,000 and the IHT bill would be £80,000. A reduced rate of 36% applies if at least 10% of the net estate is left to charity.
Does my London property attract inheritance tax?
Yes — London property prices mean many homeowners have estates above the IHT threshold. A property worth £800,000 plus savings, investments, and life insurance proceeds could easily push a single person's estate above £325,000. Married couples have better protection, but even with the residence nil-rate band, London estates frequently attract significant IHT.
Does life insurance count as part of your estate for IHT?
It depends. Life insurance paid directly to your estate is counted and may be subject to 40% IHT. However, life insurance written in trust passes directly to your beneficiaries outside your estate — meaning no IHT and no probate delays. This is one of the most impactful and easiest steps you can take, and we set it up as part of every policy at no extra cost.
What is the 7-year rule for inheritance tax?
Gifts made to individuals more than 7 years before death are entirely free of IHT (potentially exempt transfers). Gifts made within 7 years are tapered: 0–3 years = 40%, 3–4 years = 32%, 4–5 years = 24%, 5–6 years = 16%, 6–7 years = 8%. You can also give up to £3,000 per year tax-free (annual exemption), and unlimited gifts from surplus income.
Can I avoid inheritance tax by giving my house to my children?
Giving your home to your children while continuing to live in it is a "gift with reservation of benefit" and does not remove it from your estate for IHT purposes. Simply gifting your home and moving out starts the 7-year clock, but requires careful planning. Specialist estate planning advice from a solicitor is essential before taking this step.
Do ISAs attract inheritance tax?
Yes — ISA balances form part of your estate and are subject to IHT. Note: pensions are generally outside your estate and do not attract IHT (though beneficiaries may pay income tax on inherited drawdown pots from age 75). Reviewing where your assets are held is an important part of IHT planning.
What professional help do I need for inheritance tax planning?
For writing life insurance policies in trust — we can help directly as part of your protection review, at no extra charge. For broader estate planning including property trusts, wills, and complex gifting strategies, you should speak to a specialist estate planning solicitor or financial planner. We are happy to refer you to trusted professionals.

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Start with the easiest win — life insurance in trust

It takes 30 minutes, costs nothing, and could save your family hundreds of thousands of pounds. We set it up as part of every life insurance application.

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