IHT and your home: a quick guide
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Will you pay inheritance tax (IHT) on your home? Many people want to pass down their property to loved ones when they die, keep the wealth within the family and away from the taxman.
In this guide, our financial planners in Grantham explain how IHT works in relation to property, offering ideas to help you navigate this complex area of estate planning.
We hope this content is helpful. If you want to discuss your financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:
01476 855 585
info@casfin.co.uk
Do I pay inheritance tax on my property?
Your inheritance tax (IHT) liability depends on your circumstances. If the value of your home exceeds £325,000, then you may need to pay 40% IHT on the property value above that threshold when you die.
For instance, suppose you never married, have no children and your home is valued at £600,000. This means that £275,000 of the property value could face 40% IHT in the future – a tax bill of £110,000.
Without liquid funds to pay the charge (e.g. savings) the property may need to be sold by your executors to release the necessary cash.
If your property is valued under £325,000 – say, at £200,000 – and your other assets do not bring the total value of your estate over this amount, then you may not face an IHT bill.
What if my property is worth over £325,000?
If your home is valued over £325,000 this does not necessarily mean that it will incur IHT. In particular, the residence nil rate band (RNRB) lets you “extend” your IHT-free threshold provided certain conditions are met.
In 2023-24, the RNRB is worth up to £175,000 and applies if you leave your family home to “direct descends” (e.g. children). This means that an individual could pass down a £500,000 property to their loved ones when he/she dies (£325,000 + £175,000).
Married couples and civil partnerships also have an advantage because any unused IHT allowance from a deceased partner can pass to the surviving person. In effect, this can “double” an individual’s normal IHT-free allowance.
For example, suppose a husband and wife own their home outright and the former dies. His estate (e.g. his ownership in the property) passes to his wife without a tax charge. She also inherits his full £325,000 IHT allowance, which he has not used.
When combined with her own IHT allowance, she could pass down £650,000 to beneficiaries without IHT. Moreover, she also inherits her husband’s unused RNRB. Adding this to her own £175,000 RNRB, she could pass down an extra £350,000 without IHT – provided the family home is inherited by her direct descendants and is worth at least £350,000.
In theory, therefore, a married couple or civil partnership could pass down a £1m property to loved ones after they both die – free of IHT.
How do I minimise the IHT bill on my property?
A key area to be aware of is property prices. Perhaps your home is currently below the IHT-free threshold. Yet what happens if its value rises? Could your property be exposed in the future?
The government has not raised the IHT-free threshold since 2009. Indeed, it has been frozen until April 2028. The RNRB has also, notably, not increased since the 2020-21 tax year. There are no plans published by the government to change it.
It is impossible to predict how property prices will grow in the future – or how IHT policy might change. Yet the past can provide some useful clues to help households with their estate plan.
Between January 2013 and January 2023, average UK house prices grew from £167,716 to £290,000 – a 73% increase. The next 10 years could look very different, of course. Yet what if your home continues to rise in value?
If the government retains the current IHT-free threshold (£325,000) and RNRB (£175,000) for the next 5 years, as planned, then many homes could start facing an IHT bill – perhaps without owners even realising it.
Indeed, the Office for National Statistics (ONS) believes that these tax freezes could drag 250,000 more estates into paying IHT in this timeframe.
Working with a financial planner can help you stay abreast of new developments in the tax landscape, giving you more flexibility to adapt to new rules as/when they arise. One area to discuss with a financial planner is pensions, which can be a valuable estate planning tool.
In 2023-24, an individual can pass down their pension pot(s) without IHT because they are not treated as part of their estate by HMRC. For example, if a married couple both die leaving a £1m home and £1m pension pot to their children, then these assets may not face IHT at all.
However, a married couple leaving two properties – a £1m family home and a £1m second property – would face IHT. This is because their combined IHT allowances would not extend to the second property.
The IHT landscape in the UK is complex and subject to change. For maximum peace of mind and clarity over your options, consider speaking with a financial planner.
Conclusion & invitation
If you are interested in discussing your own financial plan or estate strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:
01476 855 585
info@casfin.co.uk
