Published On: Tue, Nov 29th, 2022

Britons may be able to avoid paying inheritance tax by using their home | Personal Finance | Finance

House prices are at the highest they have ever been and most of the time they are the biggest, most expensive asset a person may have. Currently, a person will pay inheritance tax if the value of their estate, which is property, possessions and money, is over the nil rate band threshold which is £325,000. This has remained at this level since April 6, 2009 and will remain the same until at least 2028.

If an estate is worth more than this threshold, it will be taxed at a rate of 40 percent, and if it’s below, then inheritance tax does not need to be paid.

Due to the sky-high house prices, a person’s home will usually take up the majority of a person’s tax-free threshold with inheritance tax and “careful” planning is needed in order to avoid getting caught in the inheritance tax net.

Daniel Boyle, director at Freeths LLP said: “With the nil rate band frozen until 2028 many more families are being pulled into the inheritance tax net, and careful inheritance tax planning is required by an ever-increasing pool of people.”

People do have the ability to prevent their home from being dragged into this net as under the current inheritance tax rules, Britons are able to pass on their home entirely free from inheritance tax by giving their property to a spouse or civil partner when they die.

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People can also top up the threshold with the residence nil-rate band (RNRB) which is currently at £175,000 if they pass on their home to their children or grandchildren.

The resident nil rate band was brought in in 2017 and can increase someone’s inheritance tax allowance to £500,000.

Mr Boyle said: “In broad terms, the change in the legislation is to increase the amount of a person’s estate which can be passed on free from inheritance tax, where their estate includes their main residence, by providing an additional nil rate band, the resident nil rate band.”

However, this only applies to “direct descendants” so nieces and nephews, or friends do not qualify.


People can gift their property away if they move out and then live for another seven years, due to what is known as the seven-year rule.

According to these rules, gifts given in the three years before death are taxed at the full 40 percent.

Anything given three to seven years before the death is then taxed on a sliding scale known as ‘taper relief’.

The rate drops every two years, with the rate of tax dropping to 32 percent, 24 percent, 16 percent and eight percent.

If someone wants to continue living in their property after giving it away, they will need to pay rent to the new owner at the “going rate”. 

Under the current rules, the rent will need to be similar to other local rental properties and cannot be discounted, so people aren’t allowed to give “mates rates”. 

Otherwise, it counts as a “gift with reservation” and will be added to the value of their estate.

A gift with reservation is a gift that is not fully given away because the person making the gift keeps back some benefit for themselves.

Sometimes people do not have to pay rent, which applies when a person has only given away part of their property and if the new owners also live in the house.

Mr Boyle added: “It is important when undertaking any inheritance tax planning, to receive professional advice from regulated advisors and ensure that you are aware of all associated risks when considering making lifetime gifts or utilising lifetime trust structures.

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