Inheritance Tax on Your Property

Inheritance Tax On Your Property: A Guide

It is essential to know what you are going to do with your property when you die. If you have not made a will, the government may decide for you by accessing your estate & assessing Inheritance tax on any property left behind. This can lead to an unexpected bill that could leave your family without enough money to live comfortably.
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Do I Pay Inheritance Tax on My Home?

In case you’re wondering,

You pay Inheritance tax1 on your home if you are owed more than £325,000.00 in the property (or business assets) at the time of death and do not have a will to state otherwise. If you owe less than this amount, then inheritance tax is not applicable for properties left behind.

How Much Can I Save?

The answer depends on how the government levies much Inheritance Tax after they assess your estate – it could be as low as zero or upwards of 40%. The average Inheritance Tax bill amounts to 20%, but many factors contribute towards an exact figure:

  • Whether any children were born before marriage.
  • Whether there was a spouse who passed away with whom no official agreement was made.
  • Whether any property is left to minor children.

The simplest way to save for Inheritance tax is not having an estate at all, but this doesn’t seem like it would make a very satisfying life!

Simply put:

More realistically, the best thing you can do is the plan by writing up your Will so that any remaining assets are distributed in the manner you wish instead of being caught off-guard by what other family members might want – or even worse: leaving them with everything.

What Is the Primary Residence Nil-Rate Band?

A person’s principal residence is exempt from Inheritance tax, as long as it doesn’t exceed the nil-rate band, which for this year stands at £125k.

What does this mean?

This means that if you have a property worth less than £125k and want to leave it behind to your children when you die, then they won’t be liable for Inheritance tax on their inheritance – but anything over the threshold will still need paying in full!

An alternative way around Inheritance Tax should someone inherit more than one house, or other property would be with a “Residence Nil Rate Band Transfer” (RNRB2). By exempting all properties into an RNRB trust before death, the individual can pass on the nil-rate band to their beneficiaries.

Inheritance Tax Property Rates

  • up to £325,000 – nil
  • between £325,001 and £650,000 – 20% on the excess over £325k
  • over £650,00010% * Income tax rates apply

Inheritance Tax Property Rates

If you look at what percentage of a house’s value falls into one of those ranges, then it becomes clear that Inheritance Tax starts applying to places worth more than about £490k (this year).

Let me explain,

For example: if someone leaves their home with a market value of £500k and a taxable estate worth £600k, the Inheritance Tax they would pay is 20% on £110K.

Who Can Inherit My Property Tax-Free?

  • Your spouse or civil partner
  • A child under 18, who has not started full-time education at the age of 16  and is still looking after you when you die
  • A disabled person with a handicap. If in any doubt, please contact Inheritance Tax Office on 01295 214500.

The home’s market value will be applied if it isn’t adequately explained in your Will: for example, say someone left their old house worth £400k to their son, but HMRC discovered that its actual market value was nearer to £600k (making this an inheritance tax liability).

The chargeable estate could then demand payment for all outstanding taxes from the son. This might result in penalties being levied as well.

Which Properties Qualify for the Nil-Rate Band?

A home worth up to £350k if it’s your primary residence (i.e. you live there) and you’re single

The first £325k of a house, flat, or apartment is exempt from Inheritance Tax for couples who have at least one child together.

On the other hand,

A disabled person who has lived in their property without assistance can keep the value of that property free from inheritance tax by using an “Inheritance Independence” agreement with HMRC – this means they will not need anyone else to handle the sale on their behalf as long as it meets certain conditions: They must be 18 years old, or over when making the agreement and still living at the address they’ll inherit after death.

Can You Give Away Your Property Tax-Free?

The Inheritance Tax nil-rate band can be used to give away your property tax-free if you leave it to a child or grandchild in trust. A lump sum worth £325k paid into an ISA is also exempt from inheritance tax, but the donor must have sufficient unused nil rate bands for this to work.

Why Did the Rules Change?

The rules changed in April 2017 to reflect that more people use trusts to pass on their assets in the faith.

You see:

The first thing you need to know before working out your inheritance tax bill is how much you’re going to inherit – this could either be a cash gift from the most significant asset that has been sold up since death.

Next, if there’s no spouse, civil partner, or direct descendants involved, it should only be taxed at 20%. If there are any other heirs involved, they may face paying 40% (or even 45%) depending on their additional income bracket.

Common Questions

Do You Pay Inheritance Tax on Property?

How to Avoid Paying Capital Gains Tax on Inherited Property?

Who Is Eligible For the Residence Nil Rate Band?

Can You Put Your House in a Trust to Avoid Inheritance Tax?

In Conclusion

In a nutshell:

Inheritance Tax should be considered by anyone with worldwide assets to pass on, even if they are only worth a few thousand pounds. It’s also essential to consider what other family members you have in your Will and how much inheritance tax may be due.


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