Do I have to pay inheritance tax on my parents’ house?  

Inheritance tax (IHT) is one of the most controversial taxes as it reduces the amount of money that can be passed on in the event of death, by as much as 40%.

In most cases, the biggest financial asset in an estate will be the family home. Through a combination of rising house prices and the freezing of the inheritance tax-free allowance more and more estates are being forced to pay inheritance tax. However, thanks to rules introduced in 2017, it is now possible that you can pay less IHT, or even no IHT, when inheriting your parent’s house.

How does inheritance tax work?

IHT is a charge payable to HM Revenue and Customs (HMRC) on the value of the estate someone leaves behind when they die. It is paid from funds within the estate and managed by the executors - typically those named in the will - to deal with the assets that have been left.

An estate is made up of a person’s possessions. This includes physical assets, such as property, furniture, investments, and savings.  Following an announcement during the 2024 Autumn Budget, from April 2027, unused pension funds and death benefits will also be included within a person's estate for inheritance tax purposes. The value is worked out based on what the total assets are worth, minus any debts such as loans or mortgages.

IHT is charged on any amount above the value of what is known as the nil-rate band, which for the 2024/25 tax year is set at £325,000. The IHT rate for anything above this threshold is usually 40%, but can be reduced to 36% if 10% or more of the estate is left to charity or a political party.

There is no IHT to pay at all if the whole estate is below the £325,000 threshold or if everything is left to a spouse, civil partner, a charity, or a community amateur sports club. Furthermore, if the deceased's home is being passed on as part of the estate then it is possible to claim additional relief from inheritance tax as explained below.

Do I pay inheritance tax on property?

One of the highest value assets in someone’s estate is likely to be their property. According to the latest UK House Price Index (August 2024), the average property value in the UK was £292,924 which could easily push an estate above the £325,000 threshold when combined with other assets.

However, the government introduced an extra allowance in April 2017 called the Residence Nil-Rate Band (RNRB), which is applied to the value of a main residence before the nil-rate band is applied for IHT purposes. The RNRB is £175,000 for the 2024/25 tax year, and will remain at this level until 2030. 

In practice, this gives an individual's estate an IHT threshold of £500,000 before any inheritance tax needs to be paid. It can only be used on one home in the estate and must be somewhere the person lived in the UK. The RNRB can also only be claimed if the property is being inherited by direct descendants, the definition of which is covered in the next section.

The RNRB will gradually reduce or "taper" for estates worth more than £2m, even if a home is left to direct descendants. It reduces by £1 for every £2 that the estate is worth more than the £2 million taper threshold. For example, if someone died in the current tax year with the RNRB of £175,000 but their overall estate was worth £2.1 million, their residence allowance would reduce by £50,000. If the estate was worth £2.35 million, the full £175,000 allowance would totally disappear.

Any unused RNRB can be inherited by a spouse or civil partner, in the same way as the IHT nil-rate band can be inherited. That means that a married couple or a couple in a civil partnership could pass on up to £1 million worth of assets, including their home, free of inheritance tax.

It is worth pointing out that an estate can also claim for the RNRB if the person who died had downsized and moved into care or to a home of lower value on or after 8 July 2015. The rules surrounding this are complicated, but essentially the executors would need to work out how much of the RNRB was given up by moving to a lower value property.

Can you inherit a property tax-free? 

The RNRB can help direct descendants inherit a property worth up to £1 million tax-free. Direct descendants are defined as: children, grandchildren, or great-grandchildren and their spouses; or step, adopted, or foster children; or those who were under the guardianship of the deceased. This means siblings, nephews and nieces and other relatives such as cousins are excluded from this allowance.

The inheritance rules are different for married couples or those in a civil partnership as they can pass their assets to each other without any IHT. This means a husband, wife, or civil partner can inherit a property tax-free from their deceased spouse regardless of its value.

Additionally, a spouse’s unused nil-rate band threshold also passes to the surviving partner, as does any unused RNRB. The remaining spouse will have their own IHT thresholds (the nil rate band and RNRB) that are added to this, effectively allowing their estate (including property) to be worth up to £1 million when they die before there is any IHT to pay. 

On the remaining spouse's death if the estate is worth more than £2 million the taper mentioned earlier will apply to both RNRBs including the inherited RNRB.

Can you give away a property tax-free? 

Another IHT planning option is for someone to pass on their home before they die. Passing on a home can reduce the value of an estate before death, but there are strict rules under what is known as the seven-year rule.

There is normally no IHT to pay if someone passes on a home, moves out and lives in another property and survives for seven years. They need to pay the market rent and their share of the bills if they want to carry on living in it, otherwise they will be treated as the beneficial owner (under the "gift with reservation" rules) and it will remain as part of their estate. If they die within seven years of giving it away, then under the “potentially exempt transfer” rules the value of the gift forms part of their estate. 

Ordinarily the value of any gifts above the £325,000 nil-rate band threshold would then have an inheritance tax rate applied to them that depends on how long ago the gift was made. The rate of IHT tapers down the further the gift was made before the date of death. There is a 40% charge on the value of a gift above the £325,000 threshold, dropping to: 32% for three to four years; 24% for four to five years; 16% for five to six years; and 8% for six to seven years. This is charged alongside any IHT due on other assets that form part of the estate, with the nil-rate band being applied to the value of any gifts before the remaining tax-free allowance is applied to the rest of the estate.

Inheritance tax paid on gifts

Years between gift and death	IHT rate to be paid
Less than 3	40%
3 to 4	32%
4 to 5	24%
5 to 6	16%
6 to 7	8%
7 or more	0%

 

Interestingly, the RNRB can still be applied upon death to the value of a property that was gifted during someone's lifetime, even if they remained living in it and the gift fell under the gift with reservation rules, just as long as the RNRB criteria were met.

Summary

Each individual has a £325,000 nil-rate band and RNRB (if a residential home is passed on) before IHT is payable. With the RNRB currently set at £175,000, individuals have a £500,000 threshold in total (and married couples or those in civil partnerships have £1 million) that can be passed on to descendants before any IHT is owed. Just remember that the RNRB is tapered for estates worth £2 million or more.

This essentially means many people will not have to pay inheritance tax on a property, or in most cases, none at all. However, there is always the risk that these rules change, so you shouldn’t solely rely on the RNRB to reduce an IHT bill. It is best to be prepared and ensure there is a financial plan in place that may include giving gifts. There are other tools that can minimise or mitigate IHT. You could place assets in trust - which effectively takes them out of your estate and shields them from IHT - or you could take out a life insurance policy that pays out to cover the costs of an IHT bill when you die. If you are concerned about possible inheritance tax you can take advantage of a FREE Inheritance Tax Check* with a local, well rated financial adviser who will not only quantify the size of your potential inheritance tax bill, but will also tell you the steps you need to take to reduce it. Most important of all, there is no obligation on your part to do anything when you request a review.

We also suggest you read our guide on the "best ways to avoid inheritance tax" to minimise a potential IHT bill.

 

 

 

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