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How To Avoid Inheritance Tax On Property

September 28, 2021

Inheritance tax is a somewhat controversial topic, since the logic is that the money you inherit has most likely already been taxed once and should therefore be free of tax once it is passed on. Nevertheless, much as we may loathe it, inheritance tax is a reality many of us will face at some stage, and even if the inheritance we receive comes in the form of a property, it is by no means exempt.

That said, there are some ways to avoid paying inheritance tax legitimately. Let’s take a look at what inheritance tax is, how it works, and how to avoid paying inheritance tax on property in the UK.

What is inheritance tax?

Inheritance tax is a government tax that is paid on the estate left by someone who has died. This includes all monies, properties, and possessions, and whatever value is over your Inheritance Tax (IHT) threshold is taxed at a rate of 40%.

What is the Nil Rate Band?

Your estate won’t be subject to paying IHT, however, if the total value sits below the nil rate band (NRB). The NRB in the UK is currently £325,000. This threshold has been fixed at that amount and cannot change until 2025.

If your estate’s total value is less than the NRB of £325,000, then it will not be subject to any inheritance tax.

However, if your estate’s value surpasses that threshold, the amount over the NRB could be taxed at 40%. For example, if your estate value is £800,000, and the NRB is £325,000, your estate would be taxed on the £475,000 that surpasses the threshold figure. This would equate to a hefty IHT bill of £190,000.

Other UK Inheritance Tax Nil Rate Bands

When your estate is left to a spouse or civil partner, there is no inheritance tax to pay as they are IHT-exempt beneficiaries. When this occurs, your NRB is essentially unused and can be transferred to them, which can potentially double the NRB threshold to £650,000. This is called the transferable nil rate band (TNRB).

Another nil rate band that has recently come into effect is the home allowance, or residence nil rate band (RNRB). Eligibility for the RNRB requires that your property be left directly to your children or grandchildren.

The RNRB works in addition to the NRB and any applicable TNRB, meaning that, even just with the NRB and RNRB combined, your estate could potentially be protected by an allowed IHT-free threshold of up to £500,000.

When you add in the TNRB by first transferring your NRB to your surviving spouse or civil partner, the total IHT threshold you could protect your estate by is £1,000,000.

How to avoid paying inheritance tax on property

Leave your property to your partner

As discussed, leaving your property to your surviving spouse or civil partner ensures that your property is exempt from being charged IHT, and it is the most effective way to avoid it. Even if you ultimately want your property to be left to your children or grandchildren, if it is first left to your surviving spouse, they can subsequently leave it to the children and access combined tax allowances.

The Residential Nil Rate Band (RNRB) is £175,000 and is also transferable. This means that your surviving partner would subsequently be able to protect the estate by a further £350,000 allowance once they pass the property on to the children.

There are some restrictions, however, when it comes to RNRB claims, so it is important to be prudent and gain some additional legal advice in certain circumstances. For example, when an estate value exceeds £2 million, or a property is left within trusts, it may not be eligible for RNRB.

Insurance for IHT

Even though this does not technically avoid IHT, it puts a provision in place to cover the cost of it. You can take out a life insurance policy that will essentially pay the IHT when you pass, allowing you to leave your entire estate and real estate specifically to your loved ones without heavy tax implications that could otherwise force them to sell.

It is essential to make sure that your life insurance is held within a trust, otherwise, the payout will form part of your estate value and be taxed accordingly.

Gift to charity

You could opt to gift a portion of your monetary estate to a charity in order to keep the overall value below the taxable threshold. Additionally, when an estate gifts 10% or more to a charity, it will be eligible for a reduced IHT rate on the remaining value.

Gift now

Prior to your passing and your money becoming a taxable estate, start gifting it now. You can give monthly monetary gifts from your income to your beneficiaries now and they will be IHT-free. You can also gift £3,000 every year and £250 per person per year out of your capital funds.

Invest in pension funds

Another clever way to avoid paying inheritance tax on property by lowering your overall threshold is to invest any spare funds into pensions. Any monies held in a pension fund are typically IHT-free and it is generally easy to transfer these funds to a beneficiary after you pass.

You could strategically park enough money in a pension fund to cover any IHT on the property you wish to bequeath, thus leaving it unencumbered by hefty IHT penalties when you pass it on.

Taxes can sometimes be applicable when the beneficiary wants to access the funds, however, so be sure to seek advice before deciding upon this option.


Get in touch for more advice

Whether you are a buy-to-let landlord or a homeowner, there are several ways to avoid or at least minimise the amount of Inheritance Tax payable. It’s important to plan ahead, discuss the options with your family and seek expert advice from a financial advisor or property tax specialist regarding your particular circumstances.To get an up-to-date valuation on your property for tax purposes, visit portico.com/valuation, or get in touch with us on 020 7099 4000 for any other property advice you need.

Read More: A Guide To Capital Gains Tax Implications For Landlords 2021

Read More: A Complete Guide To Private Residence Relief


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