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- July 14, 2021
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Dealing with practical aspects such as money is probably the last thing on our minds when we lose a loved one. Instead, we prefer to focus on celebrating their memories and the happiness they brought into our lives. However, the reality is that sorting out the estate and dealing with inheritance tax are necessary. In this article, we will discuss how inheritance tax is applied to property.
What is Inheritance Tax?
Inheritance tax is a tax on the estate, which includes property, possessions, and money that is left to others after the death of the estate owner. This tax is only applicable if the estate is worth more than £325,000, and the tax is charged only on the portion exceeding £325,000. Typically, it is charged at a rate of 40%.
Is Inheritance Tax Always Payable?
No, inheritance tax is not always required to be paid under specific circumstances such as:
If the total value of the estate is less than £325,000.
If everything above the £325,000 threshold is left to a spouse, civil partner, a charity, or a community amateur sports club.
Inheritance Tax on Property
The rules regarding inheritance tax on property are complex, and it is advisable to consult a specialist in inheritance tax to ensure that the correct amount of tax is paid. In general:
If the property is passed on to a spouse or civil partner, no inheritance tax is payable.
If the property is passed on to children or grandchildren, including stepchildren, adopted, and foster children, the tax threshold rises to £500,000. This includes the standard £325,000 nil rate band plus £175,000 for the residence nil rate band up to an estate value of £2 million, after which there is a taper, and the residence nil rate band reduces by £1 for every £2 over £2 million.
Unused residence nil rate band allowances can be transferred to the surviving spouse or civil partner.
If the person who left the estate sold, gave away, or downsized their property to a less valuable one, it is still possible to keep all or part of the residence nil rate band of the previous property. This only applies if:
The person sold, gave away, or downsized to a less valuable home, on or after 8 July 2015.
The former home would have qualified for the RNRB (residence nil rate band) if they had kept it until they died.
Their direct descendants inherit at least some of the estate.
The downsizing rules are highly complex, and seeking expert advice on the residence nil rate band allowances is recommended.
The property can be gifted, and if the person lives for another 7 years after the gift, no inheritance tax is payable. There are two scenarios in this situation:
The person gifts the property and moves out. If they live for another 7 years after the gift, no inheritance tax is payable. However, if they die within that 7-year period, those who received the gifted property must pay inheritance tax. In this case, the amount of tax is tapered based on how long it was between the gift and death.
The person gifts the property and continues to live in the property. As long as the person pays rent at the current market value, their share of the bills, and lives for 7 years after the gift, no inheritance tax is payable. If the person does not pay full market rent, the gift is classified as a gift with reservation, and inheritance tax is payable. In this scenario, the 7-year rule does not apply.