Inheritance Tax on a House

Do I have to pay taxes on a house that I inherited?

If you are inheriting a house from your married or civil partner, you don't have to pay any tax.

Otherwise this depends on the amount of the entire estate (not just your share of the inheritance). The estate is all of the assets, including property, that the deceased party leaves behind.

How much can you inherit without paying taxes in 2021?

The threshold is £325,000. (It is higher for children or grandchildren, continue reading to find out how).

If the total amount of the estate exceeds the Inheritance tax (IHT) threshold you will have to pay inheritance tax. Unless, everything above the threshold is bequeathed to the deceased's spouse, civil partner, a charity or a community sports club.

For example: You inherit £162,500 of your uncle's £2 million estate. The first £325,000 of the estate was split between you and his other niece. £1.6 million is left to your uncle's civil partner. The remaining £75,000 is left to charity. You pay no inheritance tax.

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

If you are inheriting your parent's house (including if you are adopted, fostered, or a step-child) or your grandparent's house, the threshold increases to £500,000. There would be inheritance tax payable on the value of their estate over £500,000. If one parent or grandparent dies and their estate is less that the £500,000 threshold, then their threshold can be added to the other parent or grandparent's threshold, up to £1 million.

For example: Your grandmother dies, all of her estate is in a joint savings account and jointly owned property with your grandfather. He is now sole owner of their main residence. She has used none of her £500,000 Threshold. When your grandfather dies, the tax free threshold on his estate is £1 million. No inheritance tax is payable on the first £1 million of his (previously their shared) estate.

If their estate is worth £1.2 million, Inheritance tax on the house is only payable on the £200,000 which exceeds the threshold.

How much is inheritance tax on a property?

Inheritance tax on a house is only payable on any amount over the inheritance tax threshold. You pay inheritance tax at 40%, on anything over the threshold.

For example:

Your friend leaves you their house worth £600,000 you would pay no tax on the first £325,000. There is £275,000 left. You pay Inheritance tax at 40% on the £275,000 over the threshold. 40% of £275,000 is £110,000. You would pay £110,000 and have £165,000 plus the tax free £325,000. You will inherit £485,000 after tax.

How do I avoid inheritance tax on my property?

Get Married

If you are leaving your property to your romantic partner, you can avoid any inheritance tax by getting married or becoming civil partners before your death.

If you are bequeathing your main residence to children or grandchildren, you can combine your £500,000 threshold with the other parent or grandparent, when one of you dies. You will need to be a married couple or civil partners. When the first owner dies, any of their unused allowance (up to the full £500,000) will be carried over to the surviving owner. If however, the first owner has bequeathed an amount to another beneficiary, this will count toward their tax free allowance. Only the remaining amount of their £500,000 allowance can be carried over to the surviving partner. This could increase the tax free threshold up to £1 million.

Make a will

Unless you intend to leave everything to your legal spouse or civil partner, it is best to make a will. Without a will, your assets will be divided according to the rules of intestacy which may be liable to avoidable inheritance tax.

If you have large assets which exceed the tax free threshold, it is advisable to seek both legal and financial advice concerning your will.

Give it away!

Giving your money and assets away reduces the value of your estate exceeding the tax free threshold. Some gifts must be given seven years before you die to remain free from inheritance tax liability, but others do not:

You can gift assets, including property, for no consideration. If you survive for 7 years after making your gift, no inheritance tax will be payable. If you die within 7 years then each gift will be subject to inheritance tax on a reducing scale.

You can gift the property to whoever you like, for no consideration, using a Transfer of Equity. Or, you can gift some, or all of the beneficial interest in the property (that's the right to live in the property, and to any income from rent or sale) using a Deed of Assignment.

Transfer of Equity Deed of Assignment

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You can give inheritance tax free gifts totalling up to £3,000 per year and you can make a gift of up to £5,000 tax free to your child on the occasion of their wedding or civil partnership.

You can make inheritance tax free gifts out of excess income. They must from part of normal expenditure, be made out of your income and not reduce your standard of living.

If you have assets which have fallen in value since you purchased them (including property or shares) you can pass these on without any capital gains tax liability. Any recovery in value would accrue in the estate of the recipient and would be free from IHT liability as long as you survive for seven years.

Nothing you give to charity is liable for any inheritance tax. If you leave 10% or more to charity then any inheritance tax on your house or other assets will be payable at a reduced rate of 36% instead of 40%.

Put your assets into a trust

You can avoid inheritance tax on a house by placing in into a trust You may consider placing your assets in trust. This means that you sign the ownership of your assets to the trustees and set out your terms for how you wish them to distribute those funds to your beneficiaries. However, there are several things to note before putting your estate into trust: You no longer own anything you have placed in trust:

You can't ever get any of your assets or funds out of the trust, nor can the trustees share any capital or income from that capital with you
If you place your home into the trust, you would have to pay rent to continue living there
If you wish to buy a new home, you must do so without the use of any trust asset
If your marriage ends in divorce, a family court judge could divide the assets in the trust and add or remove beneficiaries to include your spouse
There are tax implications of setting up a trust

Alternatively, you could set up an interest in possession trust, you can still take income from the property, which will be liable to income tax.

Buy your investment properties through a limited company.

If you buy investment properties through a limited liability company, you can make the beneficiaries of your estate shareholders of your company. Then, any proceeds from the sale of that property would go to them as per their shares. This income will be taxable, though at a lower rate than inheritance tax.

Take out life insurance

You can take out life insurance to cover the potential inheritance tax bill on your house and estate. If you then place the policy in trust, this will ensure that it is paid outside of your estate.

Spend it!

Enjoy your wealth. There's not much point living on a tight budget for 40% of your scrupulous savings to get eaten up by inheritance tax. Treat yourself, take the family on holiday, make memories.

This article is intended as a guide and is not a substitute for proper financial advice.

Parachute Law Ltd does not provide stamp duty, bankruptcy, financial, tax (including capital gains tax, inheritance tax or rental income tax) advice and does not advise you as to the suitability of any documents or services for your particular circumstances.

We can introduce you to a professional accountant if you would like tax and financial advice specific to your situation and assets.

Frequently Asked Questions

What happens when siblings inherit a house?

Usually, unless the will or trust specifies otherwise, siblings inherit equal shares of the property. The most common dispute is when one or more siblings want to sell the property, while one or more want to keep it in the family.

If there are not specific instructions in the regarding the disposal of the estate, the executor of the will, or the trustee, if the estate has been placed in trust, must dispose of the estate as they see fit, in the best interest of the estate or trust.

The easiest thing is to sell the property and split the proceeds as per each sibling's percentage shares.

If the siblings don't want to part with the property, but either don't want to live in it, or cant afford to buy the others out, the property can be rented out and the income can be split as per each siblings percentage shares.

If one sibling wants to keep the property and the others don't they could buy out the other siblings' shares.

Alternatively, you may come to a private arrangement between siblings. For example: two siblings inherit the estate equally, sibling 1 agrees to take the holiday home of lesser value and sibling 2 takes the main residence of higher value, paying sibling 1 the difference over time by way of a loan.

Partition Actions

When siblings cannot agree how to divide the property, they may have to apply to court to terminate their co-ownership and force a sale of the property to divide the proceeds. This is called a partition lawsuit.

Do you need help reducing your inheritance tax on house?

Get in contact with us and see how we can help.

We can assist with:

Gifting your property to someone for no consideration
Assigning some or all of your beneficial interest in your property to someone else

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