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Inheritance tax on property

Everything you need to know about how your property is taxed when you pass it on to your heirs, and the rules and thresholds for the main residence nil-rate band in 2018-19

In this article
Do I pay inheritance tax on my home? What is the main residence nil-rate band? Inheritance tax property rates Who can inherit my property tax-free? Which properties qualify for the nil-rate band?
Estates worth more than £2m Can you give away your property tax-free?  Why did the rules change? Inheritance tax on property FAQs Get personal mortgage advice

Do I pay inheritance tax on my home?

As with the vast majority of assets, inheritance tax is levied on property when you pass away. 

But thanks to an extra allowance introduced in April 2017, couples can potentially leave property worth up to £1m before paying any tax, depending on when they pass away. 

The tax-free amount depends on who you leave the property to, when you pass away and the overall value of your estate. 

Our short video explains how this works.

What is the main residence nil-rate band?

Introduced in April 2017, the main residence nil-rate band is an extra property allowance that allows people to leave their homes to family tax-free.

Under the rules, if you're passing your home to a direct descendant, you can benefit from an additional £125,000 in tax-free allowance.

At launch, the allowance was £100,000. It is set to increase by £25,000 at the start of each tax year, until it stabilises at £175,000 in April 2020. 

The allowance only applies if you leave your home to a direct descendant – either a child or grandchild. Nieces and nephews, or friends, for example do not qualify. 

Not everyone qualifies for the full allowance. If your total estate is worth more than £2m, the extra allowance tapers off, falling by £1 for each £2 above the threshold. To find out more, read our section on estates worth more than £2m.

Married spouses and civil partners may be able to apply the unused allowance of their deceased partner – meaning they could pass on property worth up to £250,000 tax-free in 2018-19.

Inheritance tax property rates

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
2017-18 £325,000 £100,000 £425,000 £850,000
2018-19 £325,000 £125,000 £450,000 £900,000
2019-20 £325,000 £150,000 £475,000 £950,000
2020-21 £325,000 £175,000 £500,000 £1,000,000

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 will be able to 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.

Who can inherit my property 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
  • Stepchildren
  • 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. 

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Which properties qualify for the nil-rate band?

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 should 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. You can find out more in our guide to living overseas and inheritance.

Estates worth more than £2m

If you have a larger estate, the main residence nil-rate band, and therefore the amount you can pass on tax-free, reduces gradually, known as 'tapering'.

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 worth more than £2m
Tax year Main residence nil-rate band Size of estate when all nil-rate band is lost
2017-18 £100,000 £2.2m
2018-19 £125,000 £2.25m
2019-20 £150,000 £2.3m
2020-21 £175,000 £2.4m

Can you give away your property tax-free? 

The same gifting rules apply to property as other assets. If you give away a home within your lifetime, it will be classed as a potentially exempt transfer, meaning inheritance tax may be charged if you die within seven years of making the gift. 

If the gifts are worth less than the £325,000 allowance, they'll be added to your estate to work out your taxable estate. 

If they're worth more, then they will use up your tax-free allowance, and you'll be charged a tapered rate on the excess, which depends on how long you live after making the gift. 

Inheritance tax rates on gifts above the £325,000 allowance
Time between date of gift and date of donor's death Effective rate charged on gift 
0-3 years 40%
3-4 years 32%
4-5 years 24%
5-6 years 16%
6-7 years 8%
More than 7 years 0%

If you live for at least seven years after making the gift then no tax will be due – and your £325,000 tax-free allowance will not be affected. 

Why did the rules change?

The tax-free threshold has stood at £325,000 for many years, but rising property prices have meant more and more people have been pulled into inheritance tax in recent years, with more than £5bn paid at the last take. 

To reduce this burden, the new property allowance was introduced to help people leave property to family without being hit with large tax bills. 

Crucially, you only qualify for this new allowance if your estate includes a property that you've used as a home at some point in your life. 

Inheritance tax on property FAQs

 

Does the inheritance tax property allowance apply if I'm not married?

 

If you're 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 £150,000 in in 2019-20 and then £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.  

 

Do I still qualify for the allowance if I downsized my home?

 

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.

 

Can I claim the extra property allowance on a second home? 

 

In short, no. The extra property allowance only applies to your main home, although you are free to choose which one that is. It's generally beneficial to to nominate your most valuable property as the main residence. 

How does inheritance tax on overseas property work? 

In most cases, any property you own overseas will count as part of your estate, so will be subject to the normal inheritance tax rules. In other words, you'll be charged 40% of assets worth more than £325,000. 

The rules are different for non-domiciles (people who aren't UK residents for tax purposes), and depend on where they are based, but even they will need to pay UK IHT on their assets in the UK. 

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Correct as of date of publication.


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