Inheritance Tax on Property — Rates, Thresholds, and How to Reduce Your Liability

Inheritance Tax Basics

Inheritance tax (IHT) is charged at 40% on the value of an estate above the available nil-rate band(s). It is due within 6 months of the end of the month in which death occurred. If not paid, HMRC charges interest.

For most families, property is the largest single asset in the estate and therefore the primary driver of any IHT liability.

The Nil-Rate Band

Every individual has a nil-rate band of £325,000. Assets up to this amount pass free of IHT. Everything above is charged at 40% (or 36% if at least 10% of the net estate is left to charity).

Unused nil-rate band can be transferred between spouses and civil partners. A couple where neither has used their nil-rate band can pass £650,000 IHT-free.

The Residence Nil-Rate Band (RNRB)

The residence nil-rate band is an additional allowance introduced in 2017. It applies when:

• The deceased owned a residential property (or had downsized after July 2015), **and**
• The property (or equivalent value) is passed to direct descendants (children, grandchildren, step-children, adopted children)

The RNRB is £175,000 per person (2024–25 tax year). Combined with the standard nil-rate band, a single individual can pass up to £500,000 free of IHT, or £1 million for a couple.

**Tapering:** The RNRB is tapered for estates worth over £2 million. It reduces by £1 for every £2 of estate value above £2 million, meaning very large estates receive no RNRB.

Spousal Exemption

Assets passed between spouses or civil partners are completely exempt from IHT, regardless of value. This is an unlimited exemption. However, it is a deferral, not an elimination — IHT may become due on the survivor’s death.

Gifts During Lifetime

Gifts made more than 7 years before death are fully exempt from IHT (potentially exempt transfers, or PETs). Gifts made within 7 years may be subject to IHT on a sliding scale:

Gifting a property during your lifetime also has capital gains tax implications. If the property is not your main residence, CGT may be due on the market value gain at the time of the gift (HMRC treats gifts to connected persons at market value).

Nil-Rate Band Freeze

The nil-rate band has been frozen at £325,000 since 2009 and is frozen until at least 2030. As property values have risen significantly during this period, many more estates are now caught by IHT than were originally envisaged. The number of estates paying IHT has approximately doubled over the past decade.

Planning Strategies

**Tenants in common and will planning:** Holding a property as tenants in common (rather than joint tenants) allows each partner to leave their share to children on first death, making use of both nil-rate bands and both RNRBs. This can shelter up to £1 million.

**Deed of variation:** Beneficiaries can redirect inherited assets within 2 years of death to make use of available nil-rate bands or to pass assets to exempt beneficiaries.

**Gifting:** Making regular gifts out of surplus income is exempt from IHT immediately (the normal expenditure from income exemption). One-off gifts use the annual £3,000 exemption first, then become PETs.

**Trusts:** Placing property into certain trust structures can remove it from the taxable estate, though this is a complex area requiring specialist advice.

Always take professional advice from a qualified estate planning solicitor or chartered tax adviser before implementing any IHT planning strategy.