Heirs will pay less tax on homes inherited from direct relatives from 6 April, with estates worth up to £1,000,000 passed on tax-free.
Inheritance tax is currently set at 40%, but individuals will be able to pass on £175,000 worth of property tax-free – up from £150,000 in 2019-20.
The first £325,000 of an individual’s estate is already tax-free, and the £175,000 threshold for homes left to descendants is in addition to this.
This takes the inheritance tax thresholds for individuals’ estates in 2020-21 to a maximum of £500,000.
However, married couples and those in civil partnerships can pool their individual allowances, taking the total exemption to £1,000,000 in 2020-21.
For more detail on what your heirs might pay, see our inheritance tax guide.
When is property tax-free?
For your heirs to qualify for the £175,000 ‘main residence nil-rate band’, it must be included in your estate (i.e. counted within the assets you owned directly, not via a trust) and you need to have lived in it at some stage in your life.
Your heirs must also be considered ‘direct descendants’, which is defined as one of the following:
- 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.
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The table below shows the inheritance tax thresholds which apply in different circumstances – up to £500,000 for estates left by individuals and £1m for those left by couples.
After 2020-21, the plan is for the main residence nil-rate band to increase annually with inflation.
|Inheritance tax property thresholds|
|Tax year||Nil-rate band||Residence nil-rate band||Total for individuals||Total for couples|
The ‘nil-rate band’
The graph shows how the main tax-free ‘nil-rate band’ has been frozen at £325,000 for the past 12 years.
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 £2.4m in the 2020-21 tax year (or £2.3m in 2019-20), you’ll lose the entire main residence nil-rate band.
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How much inheritance tax will be payable?
To find out how much inheritance tax your heirs are likely to pay on your estate, enter your details into the calculator below.