How UK inheritance tax applies to London property for residents and non-residents: 2026/27 thresholds, reliefs, gifts and why to ask before the purchase.
By Aldo Attanasio d’Aponte – September 9, 2026
Inheritance tax on London property: what buyers should know
Inheritance tax is the fourth of the UK property taxes, after stamp duty on the way in, capital gains tax on the way out and the annual charge on company-held homes, and it is the one buyers think about least. It is charged at 40% on the value of an estate above the allowances, it applies to UK residential property whoever owns it and wherever they live, and it is the tax most likely to turn a well-chosen London purchase into a problem for the next generation. It is best considered before the offer, not after the funeral.
What is inheritance tax and when is it charged?
Inheritance tax, IHT, is charged on the value of a person’s estate on death: property, money, investments and possessions, less debts, less the allowances and reliefs. It also reaches back to catch gifts made in the seven years before death and certain lifetime transfers into trusts. The estate’s executors pay it, usually before probate is granted and the assets can be distributed, which is why a large illiquid asset such as a house can create a cash problem at the worst possible time.
The rate is 40%. A reduced rate of 36% applies where at least a tenth of the net estate is left to charity.
What are the thresholds for 2026/27?
The nil-rate band, the amount every estate can pass free of tax, is £325,000 and has been frozen at that level since 2009, with the freeze currently set to run to 2030. The residence nil-rate band adds up to £175,000 where a home, or the proceeds of one, passes to children or grandchildren, though it tapers away for estates worth more than £2m and disappears entirely above £2.35m for an individual. Both bands are transferable between spouses and civil partners, so a couple leaving a family home to their children can in principle shelter £1m.
For the estates our clients hold, those figures are small. A £5m house in Kensington left to children by a single owner will, absent planning, generate a tax bill of roughly £1.87m. The residence band will have tapered to nothing at that level of estate. The allowances matter to most of the country; at prime London prices they are a rounding error.
What is exempt?
Transfers between spouses and civil partners are exempt without limit, provided both are treated as UK long-term residents; where the recipient spouse is not, the exemption is capped unless an election is made. Gifts to charities and to political parties are exempt. Business and agricultural property attract relief, though from April 2026 full relief is limited to the first £1m of qualifying assets with 50% relief above that, a change that matters for clients holding trading companies.
Lifetime gifts are the main tool. A gift to an individual is a potentially exempt transfer: if the donor survives seven years it falls out of the estate entirely; if they die within seven years it is brought back in, with taper relief reducing the tax on gifts made more than three years before death. There is also an annual exemption of £3,000, a small-gifts exemption of £250 per recipient, wedding-gift exemptions of £5,000 for a child, £2,500 for a grandchild and £1,000 for anyone else, and an unlimited exemption for regular gifts made out of surplus income, which is underused and, for wealthy families, often the most valuable of all.
Does IHT apply to non-residents who own London property?
Yes, and this is the point most overseas buyers miss. UK residential property is within the UK inheritance tax net regardless of the owner’s residence or nationality, and since 2017 that has included property held through an offshore company or trust. The old technique of wrapping a London house in a foreign company to keep it outside the estate no longer works. Loans used to buy the property are deductible in most cases, which is why financing a purchase rather than paying cash is sometimes advised for estate reasons as well as investment ones.
The wider regime changed in April 2025. The concept of domicile was replaced by a residence test: an individual who has been UK resident for ten of the previous twenty tax years is a long-term resident and is exposed to IHT on worldwide assets, with a tail of up to ten years after leaving. A non-resident who has never met that test is exposed on UK assets only, which for our clients typically means the London property and a UK bank account. Where another country also taxes the same asset on death, the UK has treaties with a small number of jurisdictions and unilateral relief in other cases, and the executors have to claim it.
From April 2027 unused pension funds are also expected to come within the estate, which changes the arithmetic for many UK-resident clients who had treated pensions as the asset to leave untouched.
How do families plan around IHT on property?
The tools are well known and the earlier they are used the better they work. Giving property away outright, and surviving seven years, is the simplest, provided the donor does not keep using it; a parent who gifts a house and carries on living in it rent-free has achieved nothing, because the gift-with-reservation rules put it straight back in the estate. Paying a full market rent to the children after the gift solves that, at a cost.
Buying in the children’s names from the start, with the parents lending or gifting the funds, is common for a flat a child will actually live in. Trusts still have uses but carry entry, periodic and exit charges and require advice. Life insurance written in trust to meet the eventual bill is the pragmatic answer for many families who want to keep the house. Borrowing against the property reduces the net estate and can be part of a wider plan, though the rules on which loans are deductible are specific.
And a will. Without one the intestacy rules decide, and for a foreign national with assets in several countries the result can be a mess of conflicting successions. The will should be written with the London property in mind and reviewed whenever the family’s residence changes.
I would add only this from twenty years of watching clients buy. The families who handled inheritance tax well were the ones who asked the question at the same time as they asked about stamp duty. The ones who handled it badly assumed it was a problem for later.
Rates and figures correct at the time of writing; confirm the current position before relying on them.
How Arbitrage can help
We are not tax advisers and do not pretend to be. What we do is treat a London purchase as one line on a family’s balance sheet and make sure the estate question is in the room from the start, alongside your private bank, tax advisers and solicitors, so that the name on the title, the financing and the ownership structure are decided before the offer rather than after. We act only for buyers and are paid on success.
Frequently asked questions
Does a non-resident pay inheritance tax on a London flat?
Yes. UK residential property is within the inheritance tax net for everyone, however it is held and wherever the owner lives. The nil-rate band of £325,000 applies, and the balance is taxed at 40%, subject to any debt secured on the property and any treaty relief.
Can I avoid IHT by owning through an offshore company?
Not since 2017. Shares in a company whose value derives from UK residential property are treated as UK assets for inheritance tax. The structure adds cost, the annual enveloped-dwellings charge and a higher stamp duty rate, without removing the exposure.
Is it better to buy a London property in my children’s names?
For a home the children will live in, often yes, provided the funds given to them are gifted cleanly and the parents survive seven years. It has consequences for the children’s own stamp duty position on later purchases and for control of the asset, so it needs advice before the purchase, not after.
How is the tax paid if the estate is mostly a house?
Executors can elect to pay the tax on land and buildings in ten annual instalments, with interest, and can apply for probate on that basis. In practice many families sell the property or borrow against it. Life insurance in trust, arranged in advance, is the usual way to avoid a forced sale.