Yes. If you have inherited property from your parents, you still have to pay inheritance tax on it when you pass it on to your beneficiaries.
This system may seem unfair to some, but to mitigate this, the HMRC has tax reliefs that you can rely on to save on tax.
What Is The Tax Rate On Inheritance
There is a 40% tax on inheritance, which is imposed on the estate a person leaves behind. If this estate is over a certain amount called the nil rate band, then it has to pay inheritance tax (IHT).
Let’s make this simpler. The HMRC has imposed an inheritance tax on the amount of estate that is above the nil rate band set at £325,000. This means that if your estate is more than £ 325,000 at the time of your death, a tax of 40% will be imposed on it. This tax will be taken out of your estate.
You can keep the estate below the nil rate band and reduce the rate of tax using the tax relief guidelines by the government of the U.K.
One of these tax reliefs is the residential nil rate band.
The Residential Nil-rate Band
You can reduce the inheritance tax by including the residential nil rate band in it if you own property that is also your primary residence. You can use this relief if you pass on this property to your children.
Increasing the IHT nil-rate band
The government of the U.K. has set the nil-rate band at £325,000 and £650,000 for a couple upon death. This amount is applicable to everyone.
The residential nil-rate band is set at £175,000 for an individual and £350,000 for a married couple. This is an additional allowance that an estate can use. The rules to use this allowance are –
- The house should be passed on to the children.
- The property has to be the primary residence.
This provision was introduced in the tax year 2020/2021 to relieve the burden of inheritance tax on heirs.
Residential Nil-rate Band taper – The residential nil rate band will only apply if your house is valued under £2,000,000. After this amount, £1 will be reduced from the residential nil-rate band for every £2 above the amount of £2,000,000.
Using The Residential Nil-rate Band
Only direct descendants of the estate owner can avail of the residential nil-rate band. Biological children, adopted children, stepchildren, foster children, grandchildren, great-grandchildren, and their spouses are classified as direct descendants.
How To Avoid Inheritance Tax On Family Home
You can’t avoid inheritance tax if your estate is over the nil-rate band. However, you can make use of the allowances to avoid paying inheritance tax.
Ways to avoid inheritance tax on family home
- Pass on the family home before death
You can give the property to your children or heirs while you’re still alive. But you’ll have to plan this very carefully as there are very strict rules in place.
You’ll have to vacate the property and can’t live in it if you have passed it on. If you want to keep living in it then you must pay rent at the market rate and foot your bills.
Most people who want to pass their property to their children live in assisted living in their last years.
Another point is that the residence is only inheritance tax-free if you live for 7 years after you have passed on the property. If you die within 7 years then the property will be added to the estate first and then the other allowances. This reduces your allowance on other ways to save tax like gifts.
The taper relief scale will be applicable to the way your inheritance tax is calculated.
2.Using trusts to exempt property and assets from inheritance tax
A little-known fact is that you can save your assets from inheritance tax using trusts.
Trusts can also insulate you from the 7 year rule if you don’t want to be at its mercy.
When you put your assets into a trust, those assets no longer belong to you, and are not a part of your estate.
These assets belong to the trustee or the executor you apppoint for the trust. This person has to be very trustworthy and someone who will do as you wish with the assets.
It is possible to transfer the property in the trust after your death. The trustee can transfer the deed of the property to your heirs and beneficiaries.
Expert Advice to Save Money
The bigger your estate the more tricky inheritance tax gets. The U.K government has devised guidelines to help you save inheritance tax and transfer funds where it is beneficial to both you and the state.
Consider getting help from trusted estate and inheritance tax planners to calculate your estate and making the most of tax allowances.