How to avoid inheritance tax on property

avoid inheritance tax

Can you avoid inheritance tax? Inheritance tax is a tricky issue.

In short, any property, money or assets you pass on, over and above your £325,000 personal allowance (£650,000 for married couples) will be subject to an inheritance tax bill of up to 40%.

One just something that the well-off fell prey to, a frozen inheritance tax threshold and rising property prices mean that more and more people now need to plan for how inheritance tax will affect their loved ones after they die.

In fact, in the 2014-15 financial year the government received £3.8 billion in inheritance tax revenue – an 11% rise on the previous year!

How does inheritance tax work?

Inheritance tax is paid if a person’s estate (any property, money or possessions) is worth more than £325,000 when they die. Anything above the £325,000 threshold will be charged 40% inheritance tax.

How is inheritance tax paid?

The executor of the deceased person’s will will usually pay the inheritance tax using funds from the estate.

What if I pass my property onto my children before I die?

If property is passed on to children (or anyone else) before you die, it is treated as a gift and the 7 year rule will apply (see below), but you must either move out or pay the new owner market-level rent to remain in the property.

You can give away half of your home without that half being included in the estate valuation when you die, but only if the bills are shared between you and the owner of the other half of the property and if you live for a further 7 years after giving the gift.

What is the 7 year rule?

The original owner must live for 7 years after giving the gift (property, money or possessions).

Any gifts made less than 7 years before the original owner dies will be counted towards the inheritance tax threshold of £325,000, and inheritance tax will be payable on anything over the threshold.

The rate of inheritance tax payable is reduced if the gift was given 3 to 7 years before the person dies – this is known as ‘taper relief’.

Years between gift and death Tax you pay
Less than 3 40%
3-4 32%
4-5 24%
5-6 16%
6-7 8%

There is no inheritance tax payable on gifts to charities.

How to avoid inheritance tax on property?

In light of rising house prices, there are campaigns to get the inheritance tax threshold increase to, at a minimum, keep up with inflation.

Many others are calling for rise to £500,000 (which would give married couple a joint allowance of £1 million, as rules introduced in 2007 allow a partner’s allowance to pass to a surviving spouse on death), while the government have hinted at an eventual rise to a £1 million threshold.

In the meantime, there are a few steps you can take to reduce your inheritance tax liability.

Give a gift: Ultimately, the more you can ‘gift’ in advance of your death, the less inheritance tax your loved ones are going to have to pay, so start early”

You can gift cash of items worth up to £3,000 in total each year, which are exempt from inheritance tax.

You can also make separate wedding gifts, up to £5,000 for your own child, £2,500 for your grandchild and £1,000 for anyone else.

Small gifts of up to £250 a year can also be made to as many people as you like, so if you have significant assets it’s wise to gift them as soon as possible – you get the joy of seeing your loved ones receive the gift and you reduce your estate’s inheritance tax bill.

Rise of the ‘bank of mum and dad’: Parents are increasingly helping children to purchase property. Any financial help you give your child can be done as a ‘gift’. As long as you survive for 7 years after giving the gift, the money is considered outside your estate for inheritance tax purposes, irrespective of how much was given.

Show your charitable side: The inheritance tax rate may be reduced to 36% if 10% or more of the estate is left to charity.

Downsize: Research by McCarthy and Stone recently suggested that 33% of British homeowners would consider downsizing in retirement if they found a suitable property. With property providing most people’s largest asset, downsizing and giving away the cash released could seriously relieve your inheritance tax bill, as long as you live at least a further 7 years after doing so.

Move to a farm: Agricultural land is the only type of property free from inheritance tax, which has caused a surge in interest in farm properties in recent years, but it is important to note that the land must be farmed in order to make it inheritance tax exempt.

Provide for the tax: If you’re unable to give enough of your assets away before you die, the other alternative is to provide for the inheritance tax in the form of a life assurance policy in trust. Putting the policy in trust will prevent it from being included in the estate when inheritance tax is calculated and will enable the inheritance tax to be paid straight away without it impacting on the inheritance you leave your loved ones.

This content was written by Quick Move Now
Published on 15th March 2016
Last updated on 21st August 2018

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