How to avoid Inheritance Tax on UK property
Please be advised that the information in this article regarding QNUPS and IHT is no longer accurate due to the recent changes announced in the UK Budget. Starting in April 2025, the regulations will have significant implications that may affect your understanding of these topics. We encourage you to stay informed and consult with a Soteria Trusts expert to navigate these changes effectively.
The majority of people’s estate value comes from the property they own. This might be their primary home, a buy-to-let investment property or a holiday home outside of the UK which is included in your estate. Unless you’ve already done something about it, you will pay 40% Inheritance Tax (IHT) on your overall estate, including property, money and all other possessions, if they are worth more than £325,000. IHT is charged when you die, so in reality, it’s your beneficiaries, such as children, who will be burdened with this tax. Assuming your property is your biggest asset, how can you avoid paying inheritance tax on it?
Related reading: How much can you inherit without paying IHT in the UK?
Why is inheritance tax a problem for so many now?
Inheritance Tax used to be thought of by so many as a tax for the rich, but that’s changing as more and more people get caught by the IHT net. It was never targeted to hit the middle or working-class citizens; however, with the UK house prices going up rapidly, inheritance tax is not only on the minds of more and more UK citizens but also by an increasing number of foreigners who view the UK as a safe place to invest and purchase UK-assets. Yes, IHT is charged on worldwide assets for UK Nationals as well as for non-UK Nationals who decided to invest in property or other assets in the UK.
House prices are up, IHT thresholds are unchanged
While the IHT thresholds have not changed since 2009, house prices in the UK have increased by 303 % over the past 20 years, with the average house costing £81,628 in 2000 compared to £247,535 in 2021. See the table below to compare the IHT thresholds and UK average house prices.
| Inheritance Tax thresholds 2000 – 2021 / UK House Prices | ||
| Tax year | Threshold/nil rate band* | UK Average House Price |
| 2009/2026 | £325,000 | 2021 – £247,535 |
| 2008/2009 | £312,000 | |
| 2007/2008 | £300,000 | |
| 2006/2007 | £285,000 | |
| 2005/2006 | £275,000 | |
| 2004/2005 | £263,000 | |
| 2003/2004 | £255,000 | |
| 2002/2003 | £250,000 | |
| 2001/2002 | £242,000 | |
| 2000/2001 | £234,000 | 2000 – £153,000 |
* Source: https://www.gov.uk/
One change to the thresholds during that time is good news if you plan to leave your primary residence to your children or other direct descendants. If that is your intention, then you can enjoy the additional residential nil rate band of £175,000 in 2020/2021, leaving you with a total of £500,000 of the IHT threshold.
Learn more: Do I have to pay IHT on my parents’ house?
The abovementioned house prices – while at first sight might not look high – vary significantly depending on the location. For example, the average price of apartments across London is just over £530,000. Moreover, while we have only taken into account house prices, IHT is also calculated on your savings, investments, life insurance, jewellery, cash and any other assets you own at the time of death. Once your estate has been gathered up, anything over that nil rate band of £325,000 or £500,000 (for the property passed to direct descendants) is taxed at 40%.
Let’s not forget that an apartment that costs £530,000 today is more likely to double, treble, quadruple or more in value over the next 10, 20 and 30 years, increasing your estate’s value and, with it, your Inheritance Tax liability. And, of course, we all hope that the investments we make in stocks, bonds, funds, ETFs, businesses, etc, will also deliver great results for us. Those successes will only increase the potential inheritance tax bill for your beneficiaries to pay when you pass away.
IHT increase?
This might not be the end of “bad” news. Chancellor Rishi Sunak’s recent announcement of a plan to increase inheritance tax to 45% on estates worth more than £1,000,000 to offset the cost of the COVID-19 pandemic on the UK’s economy will hurt many property investors.
How to avoid Inheritance Tax on UK property
While there are quite a few legitimate strategies for reducing inheritance tax on your overall estate, for those with high-value properties or a few properties in their portfolio, we would like to present the most IHT-efficient solution: a QNUPS—Qualifying Non-UK Pension Scheme, or what we call it at Soteria, the Property Pension.
QNUPS – Qualifying Non-UK Pension Scheme can reduce Inheritance Tax because the pension allows you to hold property within it.
QNUPS can benefit anyone with UK-sited assets: investments, art, jewellery, stocks, cash, and wines, but most importantly, it can hold residential and investment property. QNUPS are very flexible, not only because of the wide range of asset classes you can hold in it, but also because a trustee/administrator is appointed to hold your pension assets on your behalf, and an investment manager to manage your funds, and your properties within the pension if that’s your wish.
What is most important though is that the QNUPS meets HMRC’s criteria and qualifies the assets held within it for an exemption from UK Inheritance Tax (IHT). There are other tax benefits from a QNUPS as well, these coming in the forms of reduced income taxes and no Capital Gains Tax irrespective of how much the asset increase in value.
What exactly is QNUPS?
The QNUPS legislation is a set of rules that must be met and followed by non-UK pension schemes in order to put the pension fund beyond the reach of inheritance tax (IHT) in the UK. It was first introduced by the HMRC itself in 2006 and amended in 2010. The schemes often operate from highly regulated and tax-efficient overseas jurisdictions where the administrators allow the members to shelter their assets from inheritance taxes in a legitimate way.
For HMMC to accept a pension scheme as a QNUPS, it should be opened and operated outside of the UK and must comply with local rules set by financial regulators in the country where they are based and those laid down by HMRC. QNUPS are normally trust-based pension,s although Contract-based schemes are becoming more popular each year. Both operate with a Trustee or an Administrator overseeing the operations of the QNUPS on a day-to-day basis and do so from popular QNUPS destinations, which are mainly jurisdictions with which the UK has double taxation agreements in place, such as Guernsey or Hong Kong.
Who can open a QNUPS?
UK residents, overseas residents, UK domiciled, and not-UK domiciled individuals can all enrol. QNUPS are legal for British expats, or foreigners with UK-sited assets to move their overseas wealth outside the reach of HMRC and won’t get anyone into trouble over tax avoidance if the rules are followed. Moreover, age is not a deciding factor for QNUPS, so you can open it at any time under the age of 75.
***You should take professional tax advice to establish your residency and domicile status before starting a QNUPS to understand the tax implications of investing and withdrawing benefits.***
Can I put my main residence into QNUPS?
No. Residential investment property, such as buy-to-lets or overseas investment properties, can be placed in the QNUPS, but your main residence can’t be in the QNUPS. You should look into other ways to reduce IHT on your main residence.
It is important to remember that QNUPS is a pension, and so its primary goal is to provide you with retirement income. The added benefit of this type of pension is that any assets held within it are considered to be IHT exempt at death. That exemption allows your loved ones and beneficiaries to inherit 40% more than they would do without it!
How can I open a QNUPS?
QNUPS is an excellent choice for expatriates, as the expat can be in one country and the QNUPS in another. Typical jurisdictions where QNUPS operate are Malta, Gibraltar, Guernsey, Isle of Man or Hong Kong. The choice is personal and is often connected to the chosen retirement destination (if known) and DTA’s – double taxation agreements between the UK and the country where the QNUPS is based. Depending on the jurisdiction and the QNUPS provider, there can be certain rules surrounding the minimal contributions, however, this is a rarity.
Is there a charge for transferring assets into a QNUPS?
There are charges for setting up a QNUPS, which can trigger some tax liabilities upon the transfer of the assets to the property pension. The costs and taxes will depend on the value of the assets that will be transferred, and therefore, it is impossible to give one answer to the question of how much QNUPS costs.
Anyone interested in using QNUPS to avoid IHT and CGT on the property should consult an advisor before taking any action. QNUPS and Inheritance Tax are complicated matters that require careful consideration and planning, which Soteria Trusts can offer. Contact us for more information and a confidential consultation today.
UK Property & Tax Seminar
QNUPS, or the ‘Property Pension’, is a topic on our monthly education webinar, called UK PROPERTY & TAX SEMINAR. We host it every first Thursday of the month. During the seminar, you will learn about the Soteria Property Pension and how best to avoid IHT pitfalls and benefit from tax allowances. We welcome you to register for it.
