How to avoid inheritance tax on property

How to avoid inheritance tax on property

Inheritance tax (IHT) impacts many UK families, especially since the huge rise in property prices. Unaware of the inheritance tax threshold, many do nothing to reduce the impact however there are several ways you can avoid inheritance tax on property and your estate or at least substantially reduce it.

10 ways to avoid inheritance tax

  1. Be aware of the IHT threshold
  2. Make a Will
  3. Leave your estate to your spouse
  4. Give money to family and friends
  5. Leave money to charity
  6. Set up a trust fund
  7. Help pay for a wedding
  8. Take out an equity release loan
  9. Take out a life insurance policy
  10. Buy a prepaid funeral plan

How does inheritance tax work?

Inheritance tax works by letting you leave assets of below £325,000 to family completely tax free – known as the nil-rate band. Anything above the £325,000 threshold is then subject to 40% tax however with careful inheritance tax planning, there are a few things you can do to mitigate this cost.

What is the inheritance tax threshold?

The inheritance tax threshold is £325,000 however an additional allowance called the ‘main residence’ allowance was introduced in 2017 / 2018 which allows you to leave a greater tax free amount when a residence is passed to a direct descendant such as a child, step-child or grandchild.

This additional nil-rate allowance was designed to increase annually up to 2020 / 2021 at which point it would grow in line with the Consumer Prices Index (CPR). However, it has now been frozen at £175,000 until 2027 / 2028.

This means that if you leave your main residence to your children, your assets with be subject to a nil-rate band of £500,000 (£325,000 + £175,000). Anything above this would be taxed at 40%.

What is the inheritance tax threshold for married couples?

The inheritance tax threshold for married couples effectively doubles when the first person to die leaves 100% of their estate to the surviving spouse. Basically, married couples or civil partners can pass any unused allowance onto their partner meaning that their nil-rate tax free band increases from £325,000 to £650,000.

This also applies to the main residence allowance, which means that if you pass your estate onto your spouse, their allowance would double from £500,000 (£325,000 IHT threshold + £175,000 main residence allowance) to £1 million.

Who pays inheritance tax?

Inheritance tax is usually paid by the executor of the Will if there’s a Will in place, or the estate administrator. If money is available in savings, IHT is paid through a Direct Payment Scheme; if funds are tied up, that tax is paid through the sale of the property.

Once the money has been paid, the remaining estate can be distributed as per the wishes stated in the Will, or in line with the rules of intestacy.

Inheritance tax should be paid within 6 months of death. If it’s not paid within this timeframe, HMRC will start charging interest. You can pay IHT on certain assets by instalments, but this also incurs interest so it’s wise to pay as much as possible within the 6-month period.

how to avoid inhertance tax on property 

How to avoid inheritance tax

Avoiding inheritance tax or at least minimizing the risk is possible if you plan in advance. You just need to be aware of the value of your estate, the options available to you for reducing the amount of inheritance tax payable and of course the current IHT threshold.

Make a Will

Making a Will is an essential part of estate planning. If you believe your estate could be liable for IHT, it would be worth getting professional advice when writing your will to ensure it is tax efficient and makes use of benefits such as the nil rate allowance.

Inheritance tax gifts

One way of reducing the value of your estate is by giving some of it away to friends and family as gifts, however there are certain rules and limits on inheritance tax gifts you need to be aware of.Gifts are still included as assets for 7 years; after which they would be subject to IHT

  • Gifts are still included as assets for 7 years; after which they would not be subject to IHT
  • You can only give away up to £3,000 a year
  • A gift is classed as something you give away completely and no longer benefit from 

Other forms of inheritance tax gifts classed as exempt include:

  • Gifts of up to £250 per person (another exemption must not have been used on the same person)
  •  Small Christmas or birthday presents
  • Gifts of any size between married couples or civil partners
  • Wedding gifts of up to £1,000 per person; £2,500 for a grandchild or great grandchild or £5,000 for a child

If you leave your estate to charity, there will be no inheritance tax to pay. Alternatively, if you prefer not to leave your whole estate, you can leave 10% or more to charity and any IHT payable will be charged at 36% instead of the normal IHT rate of 40%.

Setting up a trust fund to avoid inheritance tax

Trust funds can help avoid inheritance tax on property but with many variations, you would need specialist advice. A trust is a way of managing assets for the beneficiary; once the trust is in place, the assets no longer belong to you which is how it can help with IHT.

The type of trust fund you require will depend on what you want to achieve and who the trust is for so advice from a solicitor or independent financial advisor is a must.

An equity release loan

One way you can reduce your assets and liability for Inheritance tax is by spending it, which is where equity release can help. Giving you access to tax free money tied up in your home will reduce your estate however the impact could be greater than paying IHT so seek advice.

Taking out life Insurance

Life insurance can help with inheritance tax planning. Although it won’t reduce your IHT, if the life insurance policy is written into trust, the money paid out goes directly to the beneficiaries. meaning it won’t be liable for inheritance tax and can be used to pay the bill if required.

Pre-paying for your funeral

funeral plan is a way of arranging and paying for your funeral in advance at today’s prices. This means you’ll save money by avoiding future inflation on funeral costs and remove the worry of arranging a funeral from your family; all whilst reducing your assets and inheritance tax liability.

Inheritance tax calculator

An inheritance tax calculator like the one provided by Which? helps estimate your estate to understand whether it may be subject to inheritance tax. You simply add your assets including the value of your property, investments and cash and liabilities and the inheritance tax calculator will give you an estimate.


Your IHT questions answered

What is the inheritance tax threshold for 2024?

The inheritance tax threshold for 2024 is £325,000 however if you are leaving your main residence to your children or grandchildren, you can also benefit from the main residence allowance of £175,00. This gives you a total inheritance tax free threshold of £500,000 or £1 million for married couples.

What is the 7 year rule in inheritance tax?

Inheritance tax can be charged on gifts given within the last 7 years if the assets are greater than the IHT threshold. Anything outside this period is exempt of inheritance tax – hence the name the 7 year rule.

Can I put my house in trust to avoid inheritance tax?

Putting your house in trust can avoid inheritance tax and prevent what can be a lengthy and costly probate process. Trust funds are varied and complicated though, so it is important to seek the advice of your solicitor or an experienced independent financial adviser.

Do I have to pay inheritance tax on my parents’ house?

You won’t have to pay inheritance tax on your parent’s house if their estate is below the threshold of £325,00 or £650,000 for a married couple or civil partners where the full nil-rate allowance has been passed onto them. Anything above that will be taxed at 40%.


Did you find this information helpful?