Do I pay Inheritance Tax on property?

Article written by Kellands Hale, our preferred independent advice firm.

This article is not intended to be financial advice to any individual. The views expressed are those of the author and Moneyfactscompare.co.uk does not endorse the content.

Are you planning to leave property to your loved ones? If so, there are several tax implications you may wish to consider.

One question, which many of our clients often ask, is how Inheritance Tax (IHT) affects an inherited home.

The answer to this question isn’t straightforward, and a lot depends on your circumstances. So below, we’ve explained how IHT and property works.

IHT applies to most assets, including homes and additional properties.

However, it isn’t usually paid on estates inherited by spouses or civil partners, but could be due from anyone else who inherits your estate - including your children.

Whoever receives your home, they’ll only be required to 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.

Effectively, everyone has a total nil-rate band of up to £500,000 which is split up into two categories: 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 2024/25 tax-year.

Source: HMRC

Under the first nil-rate band, any wealth you pass on under £325,000 won’t be liable for IHT. This includes the property you own.

Depending on your circumstances, your loved ones may benefit from up to £175,000 of additional relief thanks to the residence nil-rate band. This only applies as follows:

• One of the assets you’re passing down is a family home.
• If the home is passed onto direct descendants, for example children or grandchildren.

With both reliefs available, you could pass down up to £500,000 tax-efficiently, or up to £1 million if you and your spouse combine your nil-rate bands.

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.

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.

1. 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.

1. 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 means the UK should be your main home.

There are several complex factors to consider, so it may be wise to discuss your plans with your Kellands financial planner.

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.

For every £2 over a £2 million estate value, your residence nil-rate band reduces by £1. As of 2024/25, 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.

Here are three ways you could gift property 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.

There are, however, 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.

1. 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.

1. 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”. In essence, while HMRC acknowledges that you’ve given your property away, it still considers you to have partial ownership of the home.

This means the seven year rule won’t start and your beneficiary may still be liable for IHT.

In order for this to begin, you’ll either need to live in the home with its new owner (your child), or pay rent at market value.

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, call 0161 929 8838, or click here. 

This blog 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.