13 June 2017

What is property inheritance tax?

Benjamin Franklin, once said: “The only things certain in life are death and taxes”. Whilst this is a morbid and sobering thought, he had a point and this couldn’t be truer for inheritance tax (IHT).

When a person passes away HMRC will assess how much their estate is worth, deduct any outstanding debts and the remaining figure is the overall value of the estate.

What do assets include?

A person’s assets include:

  • Cash left in a bank
  • Any investments
  • Any property a person owns
  • Any businesses a person owns
  • Any vehicles a person owns
  • Pay outs from life insurance policies
  • Personal assets

How much inheritance tax do I pay on property?

A common question that is asked frequently is how much tax must be paid on property. This depends entirely on the value of the estate.  Currently, the inheritance tax threshold is £325,000 and an estate or property will owe 40% on anything above this or 36% if 10% is left to charity.

Residence Nil Rate Band for middle income groups

In the summer budget announcement in 2015 a new residence nil rate band (RNBR) was introduced; with the aim of helping out ‘middle earners’ in the UK to pass on their estates to direct descendants when they pass away. This began to take effect for relevant property transfers on the 6th April 2017 and aims to reduce the tax paid upon death.

The current £325,000 nil rate band is set to be increased due to this new band being introduced. The increase will start at £100,000 in 2017/18 and will increase by £25,000 each year until £175,000 is reached in 2020/21. Giving each person a potential £500,000 IHT threshold.

From 2021/22 the threshold will continue to increase but only in line with the consumer price index (CPI), with any unused nil rate band still being able to be transferred to a spouse or civil partner.

The RNRB will only be available however to individuals or married couples who qualify by having a qualifying residential interest (QRI). In order to be a QRI the property must have been the individuals primary residence/home at some point in their lives. If the individual has had more than one primary residence in their life, they will be able to elect which property they wish to use as their QRI. Meaning families who wish to downsize their home in later life will not be punished for doing so.

In order to qualify the recipient must also be a direct descendant of the deceased or at least a ‘lineal descendant’ of the direct descendant, in other words one of the below:

  • The deceased’s children (this includes adopted, fostered or stepchildren) or grandchildren
  • The spouses of those children or grandchildren
  • The widows, widowers or surviving civil partners of those children or grandchildren if not remarried at the date of the death of the property owner

However, because the RNRB was introduced to help ‘middle earners’ in the UK it does also operate a ‘tapering restriction’ for those who have much higher value estates. According to HMRC ‘There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.’


Is it possible to avoid paying inheritance tax?

Yes. There’s no inheritance tax to pay if a home is passed on to a husband, wife or civil partner. There’s normally no inheritance tax to pay if the person moves out and lives for another seven years.

The person can also carry on living in the property, as long as they; pay rent to the new homeowner, pay their share of the bills or have lived there for seven years. If the person passes away during the seven years, the home will be treated as a gift and the seven year rule applies.

Need advice?

If you are looking for property tax advice or have specific questions in relation to inheritance tax on a property or estate, contact the property team at RWB on 0115 964 8888 or email at enquiries@rwbca.co.uk.


The views provided in this article are for general information purposes only. Nothing in this article represents advice of any nature whatsoever. Accordingly, RWB CA Limited does not accept any liability or responsibility for the information contained in this article or any decision or other action that may be taken in reliance upon the information contained within it. RWB CA Limited accepts no responsibility for any errors of fact or opinion and assumes no obligation to provide you with any changes to its assumptions.