Could you face inheritance tax on your property?

Inheritance tax (IHT) is often thought of as a ‘wealth tax’. And for that reason, lots of people think it won’t apply to them.

But if you’re a homeowner, you might need to reconsider.

The average UK house was worth £292,000 in July, which was up £39,000 in a year. In some parts of the country, the average house price was far higher. For example, in London it was nearly twice the national average at £543,517.

The IHT nil-rate band is only £325,000 and has been at that level since April 2009. Back then, the average house cost just £155,852. These days prices are much higher and ordinary homeowners could face an IHT bill on their estate when they pass away.

Here’s a closer look at the IHT allowances so you can get an idea of whether you could be affected, as well as potential options for reducing IHT. Keep in mind that rules can and do change, and any tax or benefits will depend on your circumstances.

This article isn’t personal advice. You should consider taking financial advice if you’re not sure if something’s right for you.

Will I pay inheritance tax?

The good news is IHT was paid on fewer than 4% of estates in the 2019/20 tax year. Although that figure is likely to be higher now, in part due to rising house prices.

You can work out whether you’re likely to pay IHT by using the tax-free allowances available.

You’ve got the IHT nil-rate band, which means the first £325,000 of your estate is not liable for IHT. But you might also be able to take advantage of the residence nil-rate band.

The residence nil-rate band currently stands at up to £175,000, and can normally be claimed when you leave your main home to direct descendants. This includes children, grandchildren, stepchildren and adopted children, but not nieces, nephews or siblings.

A benefit for anyone who’s married or in a civil partnership is that assets passed to a surviving partner on death are exempt from IHT. Plus, the surviving spouse might be able to make the most of any IHT allowances which weren’t used by their late spouse.

If your estate exceeds these allowances, you could be liable for IHT. To get an idea of whether you’ll be affected, use our IHT calculator.

IHT calculator

Keep in mind that this is only intended as a guide and that IHT can be very complicated in practice. It’s worth asking about inheritance tax advice if you think you might be affected.

Source: www.gov.uk. *Taken from July each year, rounded down to nearest thousand.

Can I reduce my inheritance tax bill?

If you think your estate could be liable to IHT, there are ways you can try and reduce the IHT due when you pass away.

For example, you can use your gifting allowances during your lifetime and consider gifting to charity. You could also think about things like sheltering wealth in a pension and investing in companies that qualify for relief from IHT.

5 ways to reduce your inheritance tax bill

The issue with many of these strategies is they involve giving away assets alongside your property. This might not be helpful if your property is your biggest asset and you need your remaining wealth to live off.

IHT is also notoriously difficult to navigate, and you could get your fingers burned if you get it wrong. For example, companies that do qualify for relief from IHT are usually smaller and newer. It’s a higher-risk investment, so there’s a greater chance of getting back less than you invest.

To make sure any IHT strategy you take also fits in with your other financial needs and goals, it’s worth getting the help of a financial adviser.

Why consider inheritance tax advice

A financial adviser can explain how the IHT rules apply to you, and outline strategies for reducing your bill. They can set out all your options and any potential trade-offs. That way, you can make a more well-informed decision, without any nasty surprises later.

With advice, you can rest assured that your other financial needs and goals have been accounted for. It means you can pass as much of your wealth on as possible, in the way you want to, and still have enough money to do the things you love.

An adviser won’t perform complex tax calculations or help with your tax return. But they can look at your overall finances and make sure they’re set up to help you save money on tax where possible.

See if advice could help you

The first step in finding out whether you could benefit from financial advice is to book a call with our advisory helpdesk. They don’t give personal advice themselves, but they’ll make sure advice is right for you and you’re comfortable with the charges involved. If you’re happy to go ahead, they’ll put you in touch with an adviser.

Please note: We can only provide advice to UK residents. If you’re resident overseas, unfortunately we’re unable to advise you.

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