Do I pay inheritance tax on a property?
From April 2017, the amount you can pass on to your loved ones without having to pay any inheritance tax got a significant boost.
In just a few years time, married couples and civil partners will be able to pass on as much as £1m without their heirs being hit by a big tax bill.
This means that, individually, you'll be able to pass on an extra £175,000 free of inheritance tax by 2020. But crucially, you'll only get this extra tax-free allowance if what you're passing on - your estate - includes your home.
Our short video explains how this works.
Why are there new rules for inheritance tax on property and homes?
Every person can pass on £325,000 before their heirs pay inheritance tax, which is 40% on anything above that amount. This is called the inheritance tax 'nil-rate band'.
If you're married or in a civil partnership, however, you can inherit any unused allowance from your husband, wife or partner. That means that married couples and civil partners can pass on £650,000.
We've explained how this works in our guide to inheritance tax for couples.
Most people's estate - what they are passing on to their heirs - includes a property. And because property prices have been rising rapidly over the past few years, the government is giving people an extra allowance to prevent more people falling into the inheritance tax trap.
Crucially, you only qualify for this new allowance is your estate includes a property that you've used as a home at some point in your life.
Find out more: Discover how much your property is worth with our interactive map
How much can I pass on under the inheritance tax property rules?
The increase to the nil-rate band is happening gradually between April 2017 and April 2020. The table below shows how your inheritance tax allowance will increase over the next few years.
|Inheritance tax property thresholds|
|Tax year||Nil-rate band||Residence nil-rate band||Total for individuals||Total for couples|
In April 2018, you'll be able to pass on £125,000. Your spouse or civil partner has the same allowance, effectively doubling what you can pass on to £250,000.
Each year, this new allowance will rise by £25,000 until April 2020, when you'll be able to pass on an additional £175,000. This means that individually, you can pass on as much as £500,000 tax free.
As married couples and civil partner's can inherit any unused allowance from their spouse, a total of £1m can be passed on tax free.
And after 2020, the plan is for the main residence nil-rate band to increase annually with inflation. But we can't tell you what that is yet!
Who can inherit my property inheritance tax-free?
The government's rules state that only 'direct descendants' of people who have died can benefit from the new main residence nil-rate band.
Direct descendants are described as:
- Children and their spouses or civil partners
- Grandchildren and their spouses or civil partners
- Great-grandchildren and their spouses or civil partners
- Adopted children
- Foster children
- Children who were under the guardianship of the people passing on their estate
This means that nephews, nieces, siblings and other relatives will not benefit from the new allowance if a home is passed on to them.
What does 'main residence' mean for inheritance tax purposes?
The main residence nil-rate band applies to only one home. It must be included in your estate (ie it's something that you are passing on) and you need to have lived in it at some stage in your life.
If you own more than one home, the executor of your estate can nominate which one can be used against the inheritance tax property allowance.
The good news is that you don't have to have lived in or owned the property for a minimum time - it can be any property you've lived in at some point.
The home doesn't even have to be in the UK, but whether or not your heirs pay UK inheritance tax depends on your 'domicile' at the time of your death. Find out more in our guide to living overseas and inheritance.
But if you're a landlord, and you've only ever rented out a second (or third or more!) property that you own, this does not qualify for property allowance.
My home is worth £2m. Do I qualify for the inheritance tax property allowance?
If you have a larger estate, the main residence nil-rate band, and therefore the amount you can pass on tax-free, reduces gradually.
This is technically called a 'taper'.
For every £2 that your estate is over £2m, the new property allowance is reduced by £1.
So, if your estate is worth £2.25m in the 2018-19 tax year, you'll lose the entire main residence nil-rate band.
The table below shows the size of estate when the entire nil-rate band is lost.
|How the inheritance tax allowance is reduced for estates over £2 million|
|Tax year||Main residence nil-rate band||Size of estate when all nil-rate band is lost|
Can I still qualify for the new inheritance tax property allowance if I'm not married?
If you are single and have a property in your estate, your heirs will benefit from the main residence nil-rate band.
This means you'll have the £325,000 nil-rate band, plus an extra £125,000 in 2018/19, rising to £175,000 in 2020.
But unmarried couples will not be able to inherit their partner's unused nil-rate bands which, in effect, doubles the amount that can be passed on.
By 2020, married couples and civil partners will be able to pass on £1m inheritance tax free, whereas unmarried couples will only be able to pass on £500,000.
What happens if I've downsized my home? Do I still qualify for the allowance?
One of the benefits of the inheritance tax changes for property is that people who have sold their main home and bought a cheaper property can still benefit from the new allowance.
The executors of your estate will need to work out what's technically known as your 'downsizing addition'. This is the amount of the main residence nil-rate band that you would have 'lost' by moving to a cheaper home.
You work this out by calculating the proportion of the nil-rate band you would have received on your original property and your new home. The government has published a number of examples showing how this works.
However, the downsizing addition only really applies if the value of your home when you die is worth less than the main residence nil-rate band at the time of your death.
The executors of your estate have two years following your death to claim your downsizing addition. It would be helpful to make a note of when you sold your home, and what was left after you downsized, so that your executors know exactly what to claim.