Inheritance Tax (IHT) is charged at 40% on the value of your estate above the available nil rate bands when you die. With the nil rate band frozen at £325,000 since 2009, and property values in North West London significantly above the national average, IHT has shifted from a concern for the very wealthy to a real issue for many ordinary families in the Harrow, Stanmore, and Wembley area.
The good news is that IHT is one of the most plan-able taxes. There are several legitimate and well-established strategies to reduce your estate's IHT liability significantly — but most of them require time. The earlier you plan, the greater the potential saving.
The Nil Rate Bands in 2026/27
Basic nil rate band: £325,000 — applies to every individual. The first £325,000 of your estate is free of IHT.
Residence nil rate band (RNRB): £175,000 — available where you leave your main home (or the proceeds of a sold home) to direct descendants (children, grandchildren). This brings the total potential exemption for homeowners to £500,000 per person.
Spouse/civil partner transferability: Any unused nil rate band and RNRB can be transferred to a surviving spouse. A couple can therefore potentially pass £1,000,000 free of IHT to their children (£500,000 on first death transferred to survivor, plus £500,000 on second death).
RNRB taper: The RNRB is reduced by £1 for every £2 of estate value above £2 million. For larger estates, the RNRB may be partially or fully unavailable.
Gifts During Lifetime — The Most Effective IHT Tool
Gifts made during your lifetime can reduce the value of your estate for IHT purposes. The key rules:
The annual exemption: £3,000 per year. You can give away £3,000 per year completely free of IHT. This is not per recipient — it is total across all gifts. Unused allowance from the previous tax year can be carried forward once, allowing up to £6,000 in a year where last year was unused.
Small gifts exemption: Any number of gifts of up to £250 per person per year are exempt. This is separate from the £3,000 annual exemption.
Wedding gifts: Parents can give up to £5,000, grandparents up to £2,500, and others up to £1,000, all IHT-exempt on marriage or civil partnership.
Normal expenditure out of income: Regular gifts made out of income (not capital) that form part of your normal expenditure and do not reduce your standard of living are fully exempt with no upper limit. This is a powerful relief for individuals with pension or investment income they do not need to live on.
Potentially Exempt Transfers (PETs): Larger gifts that do not fall within an exemption are PETs. If you survive seven years after making the gift, it falls completely outside your estate. If you die within seven years, it may be chargeable. Taper relief reduces the IHT on PETs made three to seven years before death.
Trusts
Placing assets in certain types of trust removes them from your estate for IHT purposes, though trust taxation is complex and has changed significantly in recent years. The most commonly used include:
Discretionary trusts: Assets transferred into the trust are removed from your estate after seven years. Useful for passing assets to grandchildren or managing family wealth across generations.
Bare trusts (absolute trusts): The simplest form of trust, often used for gifts to children and grandchildren. The beneficiary has an absolute right to the assets at 18.
Trust planning requires specialist legal and tax advice. The rules around periodic charges, exit charges, and beneficiary taxation are complex.
Business Property Relief (BPR) and Agricultural Property Relief (APR)
Qualifying business assets may be eligible for Business Property Relief of 50% or 100%, reducing or eliminating IHT on that portion of the estate. Trading businesses and AIM shares held for two or more years typically qualify. Investment businesses and property letting businesses generally do not qualify (subject to the arguments around furnished holiday lets and portfolio management).
Farming businesses and agricultural land can qualify for Agricultural Property Relief.
From April 2026, reforms to APR and BPR mean that combined claims above £1 million are subject to a 20% effective IHT rate (half the usual 40%) rather than full exemption. This is a significant change for larger estates with business and agricultural assets.
Life Insurance Written in Trust
A life insurance policy written in trust pays directly to the beneficiaries on death and does not form part of your estate. This does not reduce IHT, but it provides a lump sum specifically to pay any IHT bill, preventing beneficiaries from having to sell assets (often the family home) to fund the tax.
Whole of life policies written in trust are commonly used by individuals with estates above the nil rate bands as a straightforward IHT mitigation strategy.
Donating to Charity
Charitable bequests in your will are fully IHT-exempt. If you leave 10% or more of your net estate to charity, the IHT rate on the remainder drops from 40% to 36%.
Client A was a retired couple in Stanmore with a home valued at £680,000, savings of £180,000, and investments of £95,000 — a total estate of £955,000. Their combined nil rate bands were £650,000 (£325,000 each), plus the RNRB of £350,000 (£175,000 each, as they had a child). Their total IHT-free threshold was £1,000,000. On current values, no IHT would be due — but if property values continue to grow, IHT becomes a future concern.
We recommended a programme of regular gifting — using the £3,000 annual exemption each, and establishing a normal expenditure out of income arrangement for their pension income above their living costs. Over ten years, this programme transfers approximately £80,000 from their estate with no IHT risk. We also reviewed their wills to ensure the RNRB was being used optimally and their life insurance was written in trust.
Frequently Asked Questions
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