Do I pay Inheritance Tax on property?

When we sit down with our clients, one question they often raise is: “Will my children pay Inheritance Tax (IHT) on our home when I die?”

Read the helpful answers to our clients’ most-asked questions on IHT and property below.

How is Inheritance Tax calculated, and is my home included?

IHT is not usually paid on estates inherited by spouses or civil partners, but anyone else who inherits your estate could be required to pay it – including your children. IHT applies to most assets, including homes and additional properties.

Importantly, your loved ones will only pay IHT on wealth that surpasses the nil-rate bands. These nil-rate bands act like tax-efficient allowances which protect a portion of your wealth from an IHT charge.

There are two nil-rate bands: the nil-rate band and the residence nil-rate band. The latter is an additional relief for certain properties you pass down – something we’ll cover in detail throughout this article.

The nil-rate bands are frozen at their current rates until 2028. The below table shows their value as of the 2023/24 tax year. 

 Source: HMRC

There are rules surrounding the nil-rate bands that you should be aware of.

Firstly, the £325,000 nil-rate band works like this:

· Any wealth you have under £325,000 won’t be liable for IHT. The nil-rate band applies to all individual estates.

· Wealth in excess of the nil-rate band could attract an IHT bill.

In addition, your family may benefit from up to £175,000 of additional relief thanks to the residence nil-rate band. It works like this:

· Your family can only benefit from the residence nil-rate band if one of the assets you’re passing down is a family home.

· You’ll only gain the residence nil-rate band if your home is passed to direct descendants. This includes stepchildren, adopted children, and foster children.

· If other family members (such as nieces and nephews) inherit your home, the residence nil-rate band does not apply. The home will usually be included in your standard nil-rate band, along with the rest of your estate.

With both reliefs available, you could pass down £500,000 tax-efficiently, or £1 million if you and your spouse combine your nil-rate bands. Plus, if your spouse or civil partner passes away first, their unused nil-rate bands transfer to you.

So, your children could potentially benefit from a £1 million inheritance before IHT is due.

What rate of Inheritance Tax will I pay on property?

IHT is usually charged at a rate of 40% on all assets.

If assets are placed in a trust, this could reduce IHT in some cases. Likewise, IHT can be reduced to 36% through giving charitable gifts in your will, subject to meeting certain conditions.

What happens if I own multiple properties?

The residence nil-rate band only applies to one home. So, if you own multiple homes, here are three stipulations to be aware of.

1. You need to have lived in the property at some point

You must have lived in the property at some point to benefit from the residence nil-rate band – but you don’t have to be living there at the time of your death.

For instance, if you’d lived in a home and subsequently decided to rent it out, you might still benefit from the residence nil-rate band.

However, if your property is a buy-to-let that you rented out from the start, it won’t count.

2. The executor of your will can help decide which property benefits from the residence nil-rate band

When multiple properties are involved, the executor of your will can help decide which property should fall under the residence nil-rate band for IHT purposes.

You can make your wishes clear in your will, too.

3. Properties outside the UK can be eligible for the residence nil-rate band under some circumstances

Your family could still benefit from the residence nil-rate band if the property is outside of the UK, provided that the UK is your “domicile” when you pass away.

This depends on a number of complex factors, though, so it may be wise to discuss your plans with your Kellands financial planner.

If you have a property portfolio and are concerned about how IHT may affect your family later, there’s plenty you can do before you pass away.

We can help you:

· Strategically sell a portion of your portfolio when the time is right

· Find out which property could be passed down using the residence nil-rate band

· Assess your property wealth in combination with the other assets in your estate.

Starting your estate plans earlier in life could reduce your financial stress later on, and may help mitigate a potential IHT bill too.

Is Inheritance Tax charged differently if my total estate is worth more than £2 million?

For every £2 over a £2 million estate value, your residence nil-rate band reduces by £1. As of 2023/24, the residence nil-rate band disappears completely at £2.35 million, or £2.7 million for couples.

In this case, you and your spouse could potentially pass down £650,000 IHT-free using the standard nil-rate band, but may not benefit from additional property relief.

Can I give a property to my child to avoid Inheritance Tax?

Here are three ways you could give a home to your child, and the IHT that may apply in each scenario.

1. Gifting a home to your child or grandchild

If you decide to give a property to a child or grandchild as a gift, this could help to reduce IHT later.

Nevertheless, there are some conditions to this process. Gifting a property is known as a “potentially exempt transfer” (PET) that may not be subject to IHT – but this is no guarantee.

Indeed, if you pass away fewer than seven years after you give the property away, it could still form part of your estate for IHT purposes.

So, if you wish to give a home as a gift to reduce IHT, consult your Kellands financial planner for a breakdown of the potential tax implications.

2. Placing a home in trust for a child

Buying a home and placing it in trust for a child, or putting an existing property in trust for the same purpose, can be extremely helpful in mitigating IHT.

Within the rules of some trusts, your child could:

· Move into a property you buy and live there for free

· Inherit the property tax-efficiently.

Your ability to reduce IHT through trusts depends on:

· If you buy the property with a mortgage or in full

· The type of trust you place the property within

· Your wider financial circumstances.

Speak with a Kellands financial planner to discuss putting a property in trust to mitigate IHT.

3. Putting your existing family home in your child’s name

You could be tempted to transfer ownership of your main family home to your child in order to reduce IHT. This can be helpful, but only if you follow the rules to the letter. If you don’t, it could be considered a “gift with reservation of benefit”.

First, if you move out of the property after placing it in your child’s name – such as into a nursing home or rented accommodation – this counts as a PET. You could avoid paying IHT on the home if you pass away more than seven years after ownership is transferred, but of course, this outcome is not guaranteed.

If you plan to continue living in the home after transferring ownership over, you will need to live there with the new owner (your child), or pay rent at market value if you live there alone.

In essence, your child will become your landlord. Without strict adherence to these rules, the home is likely to still count as yours when you die.

Get in touch

As you can see, the rules around IHT and property are complex, and as always, these may change over the coming years.

There is no one-size-fits-all estate plan that suits everyone. Fortunately, our financial planners can help put together a bespoke strategy that works for your family.

To discuss anything you read here, and to begin the estate planning process, email us at hale@kelland.co.uk, or call 0161 929 8838.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate estate planning, tax planning or will writing.

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