How to Avoid Inheritance Tax on a House in the UK: Strategies Explained
One of the major questions asked when the need to transfer the house arises is that, will my home be subjected to inheritance tax? The UK government provides a threshold to inheritance tax. If your estate doesn’t fall under this threshold, you won’t be liable to pay any inheritance tax.
As the UK regulations evolve, the tax liability over the succession of assets also increases. However, with effective planning, you can reduce the amount of inheritance tax you pay in total on your house.
In this blog, Lanop Business and Tax Advisors are going to provide a comprehensive guide into key strategies on how to avoid inheritance tax on the house or completely avoid it.
What is Inheritance Tax?
Inheritance tax is the amount of tax you pay on the estate that is inherited after someone dies. The estate could include any investments, property, savings, or other assets. In the UK, if you have assets of more than £325,000, then they will be subjected to inheritance tax.
Why Save on Inheritance Tax?
Inheritance tax can take away a big part of your estate. In the UK this value is about 40%. Reducing the inheritance tax and applying several strategies can help your next generation get more help from the legacy.
Moreover, after your house has been transferred, you may have to sell your house quickly to pay the inheritance tax bill, and this may lose your house’s actual value. That’s why planning saves you by getting the exact value of your assets and a smooth transition to the next generations.
Who is exempted From Paying Inheritance Tax?
In the UK, there is a specific requirement that you must meet to pay inheritance tax. If you don’t meet the threshold, then you will not be liable for any tax. Here’s the IHT tax liability requirement in the UK
- If your total estate is below £325,000
- If you leave everything for your spouse or civil partner
- If you leave your estate above the threshold to a charity or a community amateur sports club
If your assets are transferred to your children that the inheritance tax will be deducted at a threshold of £500,000.
Here are 7 crucial Strategies that you can utilize to save on inheritance tax in the UK.
1. Gifting to Beat the Taxman
You can gift house to avoid inheritance tax during your lifetime. Property transferred as a gift 7 years before death is not subjected to any tax. This is known as the Seven year rule in inheritance tax UK.
While the other property is transferred as a gift, 6-7 years before the inheritance will be liable for 8% inheritance tax. Gifting house to avoid inheritance tax 5-6 years before inheritance will be liable of 16% IHT and so on.
Period Between Death and Gift | Taxable Gifts |
7 years or more | 0% |
6 – 7 years | 8% |
5 – 6 years | 16% |
4 – 5 years | 24% |
3 – 4 years | 32% |
2. Leave Your House to Your Spouse
If you leave your estate to your spouse, it will not be taxed. This is the best way you can transfer your estate to your family without affecting your nil band rate. However, if you choose to transfer your wealth for your children the part will be taxed up to 40% according to the UK government.
3. Buy Your Parents' House and Rent It
Do you think of buying parents house to avoid inheritance tax? If you buy property from your parents, then your parents have to look for a new house to live in. However, if they still live in the house, it will be subjected to IHT and considered as an estate of your parents transferred.
The best way to avoid inheritance tax parents house is by selling your house to your parents and then signing a tenancy agreement for a fixed rent. In this case, the estate will be considered yours, and you won’t be liable for inheritance tax.
4. Donate House to Charity
Any donations you make to a charity that is registered under the UK government will not be liable for tax deductions. Giving to charity is also profitable as it exempts tax from the remaining inherited state. This means if you give more than 10% of your estate to charity, then the remaining state inherited by the other party will not be liable for tax. This will make it a more valuable option.
5. Give Your Home to Your Children and Grandchildren
Inheritance tax rules on family homes offer that if you are leaving your house to your children and grandchildren, then the UK government gives you a special type of tax exemption called “main residence nil-rate band”.
This means the tax threshold for your main residence increases to a total of £500,000. This is only possible if your total estate is below £ 2 million. You have the choice to choose which house of yours will the main residence nil rate apply.
6. Set Up a Trust
Trust actually gives someone power over your house or property while some else, like your children or grandchildren, could benefit from it. This type of property is not liable to inheritance tax. It is preferred to contact a financial advisor to ensure that your trust follows the criteria.
7. Exempt Inheritance Tax by Taking Life Insurance
One of the best ways to save on inheritance tax on your house is by taking life insurance on the asset that is taxable. For example, if your house is worth £900,000, which is £400,000 above the threshold for the main residence, which is £500,000.
Then 40% of the tax will be deducted from the £400,000 worth of assets. The tax will be £160,000, so you need to have life insurance for £160,000 only to save on your tax bill completely.
Avoid Inheritance Tax on House Seamlessly
Inheritance tax planning is the best way to avoid inheritance tax house. Either gifting house to avoid inheritance tax, leaving your estate to your spouse or buying your house from your parents is the best way you can save on your inheritance tax efficiently. Planning ahead is the best way you can reduce your inheritance tax on the house or get it completely nil altogether.
Get in touch with Lanop Business and Tax Advisors and save your assets for future generations with effective inheritance tax planning in the UK.
FAQs
Can I buy my parents’ house to avoid inheritance tax?
No, buying your parents’ house cannot help you avoid your inheritance tax. The best way is to buy a house and sign a tenancy agreement with your parents. This is how your estate will be considered as yours and will be liable for IHT.
Can I give my house away to avoid inheritance tax?
Yes, you can gift your property and avoid inheritance tax. If you gift your house 7 years before inheritance, then you will not have to pay any inheritance tax. However, as the time period between the gifting and the inheritance decreases, the inheritance tax will increase.
Can you gift your house to avoid inheritance tax?
Yes, you can gift your house to avoid inheritance tax. If you have gifted your house 7 years before, then you don’t have to pay for the inheritance tax. However, if you gift your property 6-7 years before inheritance, then you must pay 8% tax on it. Property gifted 5-6 years before inheritance is liable to 16% of tax and so on.
How to avoid inheritance tax on house UK:
Leaving your home to children or grandchildren allows up to £175,000 extra tax-free allowance. If combined with the standard threshold, a couple can pass on up to £1 million. Using trusts or placing life insurance in trusts can also support tax planning.
How can inheritance tax be avoided in a parent’s house?
Check if your parents’ estate qualifies for the residence nil-rate band. Ensure they will clearly state who inherits the property. If the house is jointly owned, how it’s structured matters. You can apply several strategies to avoid inheritance tax like
Gifting property prior to seven years of death
- Buying property from parents and renting it.
- Give a part of your parents’ house to charity.
- Inheriting from your parents increases the threshold of IHT to £500,000.
