Inheritance tax can be a touchy subject. Some see it as just another tax, but others think it’s unfair that, after a lifetime of paying taxes, their hard-earned assets could still go to HMRC. Whatever the case, there are several legitimate ways to reduce your inheritance tax bill and leave more to your loved ones.
One asset people commonly choose to pass on is property. When done right, gifting property can help mitigate inheritance tax liabilities significantly while fulfilling your wishes at the same time. It’s a complex area though, and wrong moves can prove costly and time-consuming in the future.
Below, read a quick summary of inheritance tax and its relation to property.
What is inheritance tax?
Inheritance tax is a tax applied to your estate when you die. Your estate includes property as well as other assets such as cash, investments and possessions, minus any liabilities like mortgages.
What are the inheritance tax thresholds?
It’s key to note that you usually won’t pay inheritance tax on your estate below a standard £325,000 threshold. After that, your estate is taxed at a headline rate of 40% for the current tax year.
This comes with some exceptions, such as transferring assets to a spouse or civil partner or leaving them for registered charities. But most important in this context is the residence nil-rate band. It provides an extra £175,000 allowance when passing on a main residence to children or grandchildren, providing your total estate is worth under £2 million.
Gifting property to your children
Rising house prices have contributed to record inheritance tax bills in recent times, with receipts in February 2023 taking the total for the 2022/23 tax year to £6.4bn. Such headlines make it vital for families to consider their tax planning and avoid paying more than they need to.
There are various ways to pass on property, each with different tax implications:
- You could transfer your property during your lifetime, known as a lifetime gift, and remove it from your estate entirely, providing you live for seven years afterwards and move out.
- You could transfer your property to a trust if your children are aged under 18 or vulnerable.
- You could leave your property to your children in your will, avoiding capital gains tax and stamp duty but incurring inheritance tax.
It’s wise to carefully consider your options to understand which is most suitable for your family.
Seeking professional advice
Inheritance tax law can get complicated; there are further tax implications if your property is a rental or second home, for example.
Seeking advice from independent estate planning professionals may prove savvy. They can assess your situation and goals to recommend the route that will make the most financial sense, avoiding any legal pitfalls in the process.
Have you got your house in order regarding inheritance tax?