Passing down the family home comes with inheritance tax (IHT) challenges that can significantly reduce what your loved ones receive. You can minimise or even avoid IHT by using specific strategies like making use of the Residence Nil Rate Band, careful gifting, and setting up trusts. These methods help protect your property’s value for the next generation while staying within the law.
Understanding how thresholds and exemptions apply to your estate is key to effective planning. Property often forms the largest part of an estate, making it essential to explore options that reduce your tax bill, such as downsizing, joint ownership structures, or life insurance policies to cover IHT costs.
This guide will walk you through practical steps to pass on your family home tax-efficiently, helping you secure your legacy and ease the financial burden on your descendants.
Inheritance Tax (IHT) can significantly affect the value of your property when passing it down. Knowing how IHT is calculated, the available tax-free allowances, and common pitfalls can help you protect your family home and reduce the tax owed.
Inheritance Tax is a tax charged on the value of your estate when you die, including your property. You only pay IHT if your estate is worth more than the threshold, which is currently £325,000.
The tax rate is 40% on the part of your estate above this threshold. For example, if your estate, including your home, is valued at £500,000, you pay 40% on £175,000 (£500,000 minus £325,000).
Remember, money, possessions, and property all count towards this total. Certain gifts made before your death may also affect your IHT bill, especially if given within seven years of dying.
The nil-rate band is the tax-free allowance currently set at £325,000 per person. This means you won’t pay IHT on this portion of your estate.
There’s an additional allowance called the residence nil-rate band (RNRB), which applies when you leave your main home to your children or direct descendants. It can add up to £175,000 in tax-free allowance.
Combined, these can raise your total IHT threshold to £500,000 per person. For married couples or civil partners, this can double to £1 million if properly planned.
The RNRB decreases if the estate is worth more than £2 million, so high-value estates need careful planning.
One common mistake is not updating your will to reflect changes in relationships or asset values, which can cause unintended tax issues.
Another is overlooking the seven-year rule on gifts. Gifts made within seven years of death may still be counted towards IHT unless planned correctly.
Failing to use both the nil-rate band and residence nil-rate band fully, especially after a spouse’s death, often leads to paying more tax than necessary.
Avoid these by regularly reviewing your estate plan and seeking professional advice to use all available allowances. Proper use of trusts and gifting strategies can also help limit your IHT bill.
You can lower Inheritance Tax (IHT) on your home by using specific rules and allowances. These include gifting property, making use of the seven-year rule, and transferring assets between spouses or civil partners. Understanding these options helps you plan tax-efficiently.
Gifting your home to your children or grandchildren can increase your tax-free threshold. Normally, the IHT threshold is £325,000, but if you pass your main residence to direct descendants, this can rise to £500,000.
This applies if your total estate is worth less than £2 million. You can give the property as a gift before you die, but to avoid extra tax, you must consider the "gift with reservation" rules. If you continue to live in the home without paying rent at the market rate, the gift might still count towards your estate.
Key points:
If you give your home away and survive for at least seven years afterwards, the gift is usually exempt from IHT. This is called the seven-year rule.
However, if you die within seven years of gifting the property, the tax you pay depends on how many years passed since the gift. The closer your death is to the gift date, the higher the tax. After seven years, none of the value of the gifted home adds to your estate for IHT purposes.
Remember, if you keep living in the home without paying rent after gifting, the seven-year rule does not apply. This is because the gift is considered a "gift with reservation," keeping the property in your estate.
You can pass your home to your spouse or civil partner without paying any IHT. This transfer is completely exempt, no matter the home's value.
This exemption applies both during your lifetime and after death. The spouse or civil partner then controls the property and can leave it to other beneficiaries when they die.
If your spouse later dies, their IHT threshold includes any unused allowance from your estate. This “transferable nil-rate band” helps reduce IHT further when the second spouse dies.
Important details:
Using these methods correctly can reduce your family's IHT bill when passing down the home.
Using trusts can help you manage the family home while reducing Inheritance Tax (IHT). They provide legal ways to protect the property and control how it is passed on. Trusts can also guide who benefits and when, fitting your estate planning needs.
A discretionary trust lets you place the family home and other assets under the control of trustees. These trustees decide how and when to distribute income or capital to beneficiaries. This flexibility means the property can be protected from IHT when properly set up.
When you transfer your property into a discretionary trust, it may be removed from your estate for tax purposes. However, there might be a 20% IHT charge when creating the trust if the value exceeds the nil-rate band.
Every 10 years, the trust’s assets are reassessed for IHT, and a 6% charge may apply on the value above the allowance. When assets are taken out, another charge could happen, based on the recent valuation.
Discretionary trusts are useful if you want to protect the family home for multiple generations or provide for beneficiaries at different times.
A bare trust is simpler than discretionary trusts. It holds property on behalf of a beneficiary who has the right to the asset and its income once they reach 18 (16 in Scotland).
Bare trusts are often used to pass the family home to children directly, while trustees manage the legal paperwork. The property is treated as belonging to the beneficiary for tax purposes from the start.
This type of trust does not usually reduce IHT because the property remains in the beneficiary’s estate. However, it gives clear ownership and can avoid delays in transferring the home when you pass away.
Bare trusts are a good choice if you want straightforward control and clear inheritance without complex tax planning.
When planning to pass on your family home, certain reliefs can reduce the tax you pay. Understanding how these reliefs work, especially in relation to business or rural properties, helps you make better decisions to protect your estate.
Business Property Relief (BPR) can reduce the value of qualifying business assets for Inheritance Tax (IHT) by up to 100%. This includes unquoted shares or businesses that you have owned for at least two years. If part of your home is used for business, such as running a small office or a shop, you may qualify for partial relief on that portion.
If you transfer business assets or residential property with business use while alive, BPR can apply to reduce or eliminate IHT on those gifts. However, from April 2026, relief at 100% will be capped at £1 million of qualifying assets. Amounts above this will have reduced relief, so careful valuation and planning are needed to maximise benefits.
Agricultural Property Relief (APR) applies if your family home is part of a working farm or rural estate. You can get 100% relief on agricultural land and buildings used in farming for at least two years before death, or seven years if leased to a tenant farmer.
To qualify, the dwelling often needs to be occupied as part of the farm business. APR can significantly cut your IHT bill if your home sits on agricultural land and is crucial to farming activities. Like BPR, there is a £1 million cap on full relief starting in 2026, with a tapering effect beyond this limit.
Using APR and BPR effectively requires accurate valuations and may involve complex rules, so seeking professional advice is important to ensure your property qualifies and to plan transfers or gifts tax efficiently.
Planning your estate with property involved requires careful assessment of all assets and tax rules to protect value for your heirs. Keeping up to date with legal changes ensures your plan remains effective and compliant with current inheritance tax regulations.
You should treat your family home as part of your total estate. This means considering its value alongside other assets like savings, investments, and belongings. By doing this, you can better understand how close you may be to the inheritance tax (IHT) threshold.
Using allowances like the Residence Nil Rate Band (RNRB) is essential. It increases the tax-free amount when you pass your main home to direct descendants, potentially raising your individual threshold to £500,000.
Gifting property during your lifetime can also reduce your estate’s value. However, you need to survive seven years after the gift, and you must ensure you do not continue benefiting from the property, or it might still be counted for IHT.
Setting up trusts allows you to control property while reducing taxable estate value. Trusts can be tailored to suit personal circumstances and help manage when and how heirs receive assets.
Inheritance tax laws can change frequently, impacting thresholds, allowances, and reliefs. Keeping track of these changes can prevent unforeseen tax bills for your estate.
You should regularly review your will and estate plan, especially after major life events like marriage or the acquisition of new property. Revisiting your plan ensures you are maximising current reliefs and aligning with updated legislation.
Professional advice is crucial because complex rules around IHT and property can create pitfalls. Tax planning specialists can help you adjust strategies to fit new rules and avoid costly mistakes.
Staying informed about legislative shifts lets you act quickly, ensuring your estate plan maintains its tax-efficient structure throughout your lifetime.
Secure Your Legacy with Expert Estate Planning – Whether you need tailored estate planning advice, a trusted pensions adviser, or comprehensive inheritance tax planning solutions, Assured Private Wealth offers bespoke services to protect your family's future. Enquire now about our will writing services.
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