Do I have to pay inheritance tax on my parents’ house?
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.
A short answer to the question “Do I have to pay inheritance tax on my parent’s property” is yes. You have to pay inheritance tax in the UK for your parent’s house, and families often question why they have to pay taxes on property and estate that is theirs. During a lifetime, one will pay stamp duty land tax on property purchase, income tax, capital gain tax, and then, even upon death, a person is taxed as much as 40% of the estate’s value. This is the system we live in, but the good news is that there is an additional “tax relief” called “Residential Nil Rate Band” that you can use to lessen the IHT tax on your parent’s house.
Residential Nil Rate Band and IHT Nil Rate Band
Inheritance Tax in the UK is charged at 40% of the net estate’s value. However, there are specific ways to reduce the IHT payable on the estate. The Government has introduced two tax thresholds that help to minimise the IHT: one of them is the Inheritance Tax Nil Rate Band, and the other that has been introduced in 2017, Residential Nil Rate Band, which applies to property – family home – that will be passed on to the children.
Inheritance Tax Nil Rate Band
Inheritance Tax Nil Rate Band allowance of £325,000 per person or £650,000 for a couple upon death is applicable to everyone.
Residential Nil Rate Band
The Residential Nil Rate Band is an additional allowance that the estate can use, but it applies only to the property and only to the direct descendants. The Residence Nil Rate Band (RNRB) aims to relieve the burden of passing on the family home without incurring inheritance tax. Since the tax year 2020/2021, the RNRB equals £175,000 for an individual and £350,000 for a married couple.
Residential Nil Rate Band taper threshold
It’s important to note that the Residential Nil Rate Band only applied to property under £2,000,000. After that, the RNRB will be reduced by £1 for every £2 and will be capped at £2.350,0000 in the 2021/22 tax year. It seems that the wealthiest estates won’t be able to benefit from this tax allowance.
Who can use RNRB?
Direct descendants that can use the RNRD allowance are described as biological children, adopted children, foster or step-children, grandchildren or great-grandchildren and their spouses or civil partners, and any children under the property owner guardianship. This means that nephews, siblings, cousins and other relatives can’t use the Residential Nil Rate Band.
How can I avoid Inheritance Tax on the Family Home?
You can’t avoid Inheritance Tax, even if it’s on your family home that has been in your family for a long time. The Residential Nil Rate Band helps descendants to inherit the property worth less than £2,000,000 tax-free. There are, however, specific IHT Solutions that one can undertake to minimise their IHT exposure.
Pass on the family home while you’re still alive
One can “avoid” IHT if they pass their home to their children before they die, but there are strict rules in place to make it a successful strategy. One such rule is that if you pass on a home before you die to your children, you can’t live in it any longer – you have to move out. Sometimes people move to home care, or if they want to remain living in the property – they need to pay market-rate rent and share the bills. Moreover, you have to live for at least 7 years for the property to be entirely off your estate.
If you die within 7 years after passing on your property, then the property will be treated as a “potentially exempt transfer” and will be included back in the tax-free Nil Rate Band threshold of £325,000. The value of the gifts over the threshold will then be taxed depending on how long ago these gifts have been gifted away. The IHT will then drop only if the estate has been passed on for more than three years. If the property has been given away for over 3 years but less than 4, then the IHT rate drops to 32% and to 24% if you gifted the property 4 to 5 years ago. The IHT rate drops further to 16% if the said property has been gifted away for 5 to 6 years, 8% if over 6 years, and finally, it reaches 0% if you gifted it away more than 7 years ago.
Trust can help you exempt your family home (and other assets) from inheritance tax
If you don’t want to tamper with the 7-year rule or give away your property before you die, there are other IHT planning solutions available. Perhaps a little known fact is that trusts can protect your estate from Inheritance Tax and probate. The mechanism looks as follows: If you open trust and put your property, for example, a family home, in it, then in the light of the law, this property no longer belongs to you. The property held in trust legally belongs to the Trustee, who, acting on your instructions, can transfer the assets to your beneficiaries with the exemption of IHT tax, as when you die, property held in trust does not belong to your estate.
Protecting your wealth is the goal of our Soteria Trusts services. Since the rules surrounding Inheritance Tax in the UK are complex and changing all the time, and everyone’s circumstances are different, we recommend seeking advice from a professional tax adviser or financial planner who understands IHT and the complexities around efficient estate planning. Contact us for a free consultation today to see how we can help.
