A guide to passing on property.

If you own property, it likely makes up a considerable portion of your total overall wealth.

In the most recent HMRC data, less than 4% of deaths resulted in Inheritance Tax being paid. However, that is set to rise to over 7%, or over 50,000 people per year, over the next decade. For those impacted, it’s wise to consider how you might pass on your home to the next generation of your family in the most tax-efficient way possible.

The amount you can pass on depends on who you leave the property to, when you pass away and the overall value of your estate.

For those inheriting property, there are several factors to consider, such as the possible probate process itself but also deciding what to do with the property afterwards.

Here’s our guide on how your property is taxed when you pass it on, plus the thresholds around Inheritance Tax and the main residence Nil-Rate Band in 2024-25.

What is Inheritance Tax?

Inheritance Tax is a tax on the estate of someone who has died, including all property, possessions, and money.

There’s normally no Inheritance Tax to pay if either:

• The value of your estate is below the £325,000 Nil-Rate Band threshold
• You leave everything above the £325,000 threshold to your spouse, civil partner, a charity, or a community amateur sports club

Inheritance Tax thresholds and rates 2024-25

The rate of Inheritance Tax is 40%, while the government has previously announced that the threshold will remain frozen at £325,000 until 2027/2028. There is also an additional threshold called the ‘residence nil-rate band’ (RNRB). This is available when eligible residential property is left to direct descendants and provides an extra tax-free allowance of up to £175,000 on top of the £325,000 nil-rate band. This was introduced in 2017 to protect the family home from Inheritance Tax if it was passed down to direct descendants on death. Taking both bands together means that you have a potential tax-free threshold of up to £500,000 – or up to £1 million as a married couple (including civil partners) – that you can leave to your child tax-free, however, IHT could be levied on the second death.

Inheritance Tax on property when passing on a home

There is no Inheritance Tax to pay if you pass on a home to your spouse or civil partner when you die. However, if you leave your home to another person in your will, it counts towards the value of the estate. It must then be paid by the end of the sixth month after the person’s death before HMRC will start charging interest. It may be beneficial for you and your beneficiaries to seek independent legal advice.

If you own your home (or a share in it) your tax-free threshold can increase to £500,000 if:

• You leave it to your children (including adopted, foster or stepchildren) or grandchildren
• Your estate is worth less than £2 million

What is the seven-year rule for Inheritance Tax?

The seven-year rule still applies if you give a property away before you die. This is where no tax is due on any gifts you give if you live for seven years after giving them, unless the gift is part of a trust.

If you want to continue living in your property after giving it away, you’ll need to:

• Pay rent to the new owner at the going rate
• Pay your share of the bills
• Live there for at least seven years

Otherwise it counts as a ‘gift with reservation’ and will be added to the value of your estate when you die.

How probate affects an inherited property

If you have a will, then you will have named executors. They will be responsible for distributing the estate. You do not always need probate to be able to deal with the estate, however if required, then your inheritors can only make a decision what to do with the house once probate has been completed and the property has been officially transferred into their name.

We would recommend that you and your beneficiaries seek independent legal advice to ensure you make the best decisions for your circumstances,

Other options for transferring property

One option if the main residence is mortgage free is to transfer into a trust. This will be more effective if the value is within the Nil-Rate Band – each individual has their own Nil-Rate Band which is £325,000 for 2024/25. For any property value that exceeds the Nil-Rate Band, you will need to pay an Inheritance Tax charge.

With a Lifetime Trust, you can protect your most valuable assets, such as your property, whilst you are alive. Those assets become the property of a Lifetime Trust which must be managed and looked after.

If you continued to live in the property then placing it in the trust would be a ‘gift with a reservation of benefit’. This means the property may be subject to Inheritance Tax as part of your estate when you die.

Different types of trusts and associated rules can be complex, therefore it would be beneficial to seek professional advice.

Making the most of transferring your wealth

Passing on property requires close attention to make sure that your beneficiaries stand to gain as much as possible and in the most tax-efficient way.

If you’re a True Potential Wealth Management client and have any queries about the tax implications associated with passing on property, you can speak to one of our financial advisors or call our Relationship Management Team on 0191 500 9164. They’re available 7am-8pm on weekdays and 8am-12pm on Saturdays.

If you’re not an existing client, call one of our experts on 0191 625 0350 to learn more.