Quick Summary:
| Scenario | IHT Due? |
| Estate worth less than £325,000 | No |
| Home left to spouse/civil partner | No |
| Home left to children/grandchildren, estate under £500,000 | No (RNRB applies) |
| An estate worth more than £500,000 and left to children | Potentially yes, on the excess |
| Home was gifted more than 7 years before death | No |
| Home gifted within 7 years of death | Possibly yes, taper relief may reduce the liability |
| Home gifted, but lived in without paying rent | Yes- treated as part of the estate |
Inheritance tax on a house can be complicated, and knowing how much may have to be paid and whether the property is exempt can be confusing. In simple terms, it depends, and it will depend on:
- The value of the estate
- Who inherits it
- How the home was owned before death
- Whether the property was gifted
In this blog, we’ll look at current inheritance tax rules, including thresholds and exemptions, as well as steps you can take that may help reduce the tax liability on inherited or gifted property.
What is inheritance tax?
Inheritance tax, or IHT, is a tax on the estate of someone who has died. When we refer to the “estate”, we mean their property, money and possessions. The tax will be paid from the estate before any assets are passed to beneficiaries.
At present, IHT in England, Wales and Northern Ireland is set at 40% on the portion of the estate that exceeds the current tax-free threshold. The current tax-free amount is set at £325,000.
An executor of the estate will handle the tax rather than those set to inherit anything from it.
How much can be inherited before tax applies?
The nil-rate band, as it is known, is currently set at £325,000. Once an estate is valued above this, anything exceeding it is taxed at 40%.
Example:
- An estate is worth £500,000.
- The nil-rate band is set at £325,000
- IHT is charged on the remaining £175,000
- 40% of £175,000 creates a tax bill of £70,000
There won’t be any IHT to pay if the estate is valued at less than £325,000 or everything above the threshold is left to a spouse, civil partner, charity, or a community amateur sports club.
It is worth noting that tax thresholds are subject to change, and when you read this, new rules may be in place. Always consult HMRC or speak to a tax specialist for the most up-to-date guidance.
What is the residence nil rate band?
When it comes to property, there is an additional allowance on top of the standard £325,000 nil rate band. This is the RNRB or Residence Nil-Rate Band.
This is an additional £175,000 that applies to residential property, making the tax-free threshold £500,000. It can’t be used by everyone, though.
When does RNRB apply?
RNRB only applies when all of the following are true:
- The deceased owned a property that was their home, but not a buy-to-let or investment property
- The property is left to direct descendants. This would include children, grandchildren, stepchildren, adopted children or foster children. It does not apply to siblings, nieces, nephews or friends
- The property is passed via the will (or intestacy rules). Properties passed through a trust may not qualify
- The total estate is worth less than £2m; above this figure, the RNRB tapers off at £1 for every £2 over the threshold, disappearing entirely at £2.35 million.
Our table below explains it in a little more detail
| Who inherits the property | Potential tax-free threshold |
| Spouse or civil partner | Unlimited (fully exempt) |
| Children or grandchildren | Up to £500,000 |
| Other individuals (friends, siblings, etc) | £325,000 |
What if the deceased has downsized?
If they had sold or downsized their home after 8 July 2015, RNRB can still apply as long as the smaller home or the proceeds from the sale remain in the estate and are passed to direct descendants. This is known as downsizing addition.
Can unused RNRB be transferred?
If a married couple of civil partners both die, and the first to die left their home to the surviving partner rather than the children, their RNRB goes unused. That unused allowance can then be transferred to the surviving estate, meaning the remaining partner may have an RNRB of up to £350,000 and a total tax-free threshold of £1 million when combined with two standard nil-rate bands.
When do you pay inheritance tax on a house?
Inheritance tax on a house becomes payable when:
- The total estate, including the property, exceeds the applicable nil-rate band
- The home is not being passed to a spouse or civil partner
- The home is not being left to children or grandchildren via RNRB
- The deceased made gifts in the seven years before death that reduce available exemptions
IHT will normally be due six months after the end of the month in which the person died. If any tax remains unpaid after this date, interest will be applied.
Do I pay inheritance tax on my parents’ house?
This is a common question, and the answer is that you might.
Whether IHT applies to your parents’ house depends on whether any of the following apply when you inherit it:
- The total value of their estate. If it falls within the £325,000 standard rate or the £500,000 RNRB, no IHT is due.
- Whether RNRB applies. If your parents left the property directly to you, the higher £500,000 threshold may apply.
- Whether they were married or in a civil partnership. Any unused nil-rate band and RNRB from a deceased spouse can be transferred to the surviving spouse, and the threshold is doubled to £1 million.
If your parents’ estate is worth less than the applicable threshold and it is passed to you in their will, you are unlikely to pay any IHT on the house.
What if the house is passed to a spouse or civil partner?
In this case, no IHT is payable, regardless of the property value.
However, if the home is passed on from the surviving spouse to the next generation, that larger combined estate might be subject to the tax. Luckily, any unused nil-rate band from the first spouse can be transferred to the survivor, meaning a combined estate of up to £1 million can potentially be transferred to children tax-free.
Can a home be given away before death to avoid inheritance tax?
Giving away a home before death can reduce IHT. However, two key rules apply. The seven-year rule of the rule on gifts with reservation.
The seven-year rule
If a property is given as a gift and the person giving it moves out and no longer benefits from it, it is treated as a PET (potentially exempt transfer). Should the giver live for seven years after gifting the home, no IHT will be due on it.
If they were to die within seven years of gifting the home, IHT may be applied. It will be applied at a reduced rate based on how many years are between the gift and death.
| Years between gift and death | Inheritance tax on a gift |
| Less than 3 years | 40% |
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 or more years | 0% |
Gifts with reservation
If a home is gifted but the person gifting it remains living there, without paying a full market rent, the gift is classed as a “gift with reservation.” This means the property remains part of the estate when the original owner passes away, even if the gift was made many years before.
To avoid this, the person gifting the home would have to:
- Move out entirely
- Pay market-rate rent to the new owner
How can you avoid inheritance tax on a house?
There is no guaranteed way to eliminate IHT, but there are ways you can reduce it.
- Leave the property to a spouse or civil partner: No IHT will be due
- Use the residence nil tax band: Ensure your will passes the home directly to children or grandchildren to access the higher £500,000 threshold
- Plan early: Give the property away early enough and survive for seven or more years to benefit from the 7-year rule
- Make a will: Without a will, the property may not pass on in the most tax-efficient way
- Make a charity donation: Leave at least 10% of your estate to charity to reduce the IHT rate from 40% to 36%
- Get expert financial advice: Speak to a financial advisor for clarity on the latest rules
What other taxes may be paid?
Along with inheritance tax, Capital Gains Tax (CGT) and income tax may be due.
Capital Gains Tax
You don’t pay CGT when you inherit a property. However, if you sell the property later, tax may apply on any increase in value between the time it’s inherited and the time it is sold.
The gain is calculated from the value of the property at death, and not its original purchase price.
| Situation | Capital Gains Tax Applies |
| Inheriting the property | No |
| Selling property for more than probate value | Yes (on the gain) |
| Moving into the property as your main residence | May reduce or eliminate GCT liability |
Income tax
If you decide to rent out the inherited property, any rental income will be subject to income tax in the normal way.
At Cairds, we help you navigate the complexities and emotions of selling an inherited property. We regularly list properties for sale in Epsom and the surrounding areas, enabling a stress-free and smooth sales process. Our compassionate team is on hand to offer advice, support and guidance so you can get the property listed when you are ready. Contact us today to see how we can help.