Inheritance Tax and Property

When someone passes away the last thing most of us want to think about is money, we would rather spend our energies celebrating all the memories and the happiness that that person brought to our lives. Unfortunately, the practical aspects around the reading of the will and sorting the estate have to be dealt with and along with that comes inheritance tax. The rules around inheritance tax are quite complex and, in this article, we will take a look at how inheritance tax is applied to property.

What is Inheritance tax?

Inheritance tax is a tax on the estate, that is to say the property, possessions and money, which is bequeathed to others upon the death of the person owning the estate. The tax is only paid if the estate is worth more than £325,000 and then only on the portion above £325,000. Typically, it is charged at 40%.

Is inheritance tax always payable?

The simple answer to this is no, inheritance tax does not always need to be paid under specific circumstances:

  • If the overall value of the estate is less than £325,000
  • If everything above the £325,000 threshold is left to a spouse, civil partner, a charity or a community amateur sports club

Let’s look at the complex rules around inheritance tax when it relates to property in more detail

Inheritance tax on property

The rules around property inheritance tax are complex and we would always advise consulting a specialist in inheritance tax to ensure that the correct amount of tax is paid. In general:

  • If the property is passed on to a spouse or civil partner then no inheritance tax is payable
  • If the property is passed on to children or grandchildren, including stepchildren, adopted and foster children, the tax threshold rises to £500,000. This is the standard £325,000 nil rate band plus £175,000 for the residence nil rate band up to an estate value of £2 million at which point there is a taper and the residence nil rate band reduces by £1 for every £2 over £2 million.
  • Unused residence nil rate band allowances can be transferred to the surviving spouse or civil partner.
  • If the person leaving the estate gave away, sold or downsized their property to a less valuable one, it is still possible to keep all or part of the residence nil rate band of the previous property. This only applies if:
    • the person sold, gave away or downsized to a less valuable home, on or after 8 July 2015
    • the former home would have qualified for the RNRB (residence nil rate band) if they’d kept it until they died
    • their direct descendants inherit at least some of the estate

The downsizing rules are extremely complex and we recommend seeking expert advice on the residence nil rate band allowances.

  • The property can be gifted and as long as the person lives for another 7 years after the gift, there is no inheritance tax to pay. There are two scenarios in this situation:
    • The person gifts the property and moves out. As long as they live for another 7 years after the gift, there is no inheritance tax to pay. If they die within that 7 years then there is inheritance tax to pay by those to whom the property was gifted. In this case the 7 year rule applies and the amount of tax is tapered according to how long it was between the gift and death.
    • The person gifts the property and continues to live in the property. As long as the person pays rent at the current market value, pays their share of the bills and lives for 7 years after the gift, then no inheritance tax is payable. If the person does not pay full market rent, then the gift is classed as a gift with reservation, i.e. the person who made the gift still gets a benefit from the gift. In this case, the 7 year rule does not apply and inheritance tax is payable.

Inheritance tax is very complex, especially when it comes to property and in the sad event that a loved one passes away, it is always advisable to seek professional advice regarding the estate.