There are few more emotive financial topics than inheritance tax. No-one likes to think about a loved one passing away – or even about their own demise. However, in order to ensure that you and your family limit the amount of inheritance tax you pay, some forward planning is usually necessary.

Our advice is to bite the bullet and have a frank conversation about inheritance tax with your loved ones. If you are approaching your twilight years and have adult children and grandchildren to think about, sit them down and talk it through. If you are expecting to receive a sizeable inheritance from your ageing parents – again, isn’t it about time you all talked openly about inheritance tax planning?

Equally, anyone investing in property needs to consider their inheritance tax plan well in advance of their retirement.

Talk Property – MPU

What is inheritance tax?

Inheritance tax is tax payable on assets passed on after death. The amount payable by the recipients on an inheritance is calculated by the government and based on the value of the estate. The value of the estate is finalised after any debts are deducted from the assets at the time of death.

The largest asset most people have when they die is property and this is perhaps the most difficult aspect of inheritance tax planning – or talking about inheritance tax planning anyway – as property is personal. Other assets assessed by the government that form part of an estate include vehicles, money in the bank, life insurance payouts and investments. However, it’s property that carries the emotional weight for most families and even for investors – but this isn’t a reason to avoid the subject.

At what rate is inheritance tax charged?

Inheritance tax is currently charged at a rate of 40 per cent on inheritance valued over £325,000. You won’t pay anything on the inheritance below the value of £325,000.

Under plans introduced by George Osborne in 2015, inheritance tax is to be scrapped completely from 2020/2021 on property up to the value of £1m for couples passing on their home to children or step children when they die. For singles passing on a property, the threshold comes down to £500,000.

The changes are being brought in through the introduction of a new ‘main residence’ allowance, which we first saw in 2017/2018. Here’s where we explain how this works:

You keep your existing £325,000 inheritance tax allowance and you will also receive the main residence allowance if you are a direct descendent of the deceased. This increases in value gradually until it reaches £175,000 in 2020. The two allowances added together come to £500,000, which, for a married couple or a couple in a civil partnership, totals £1m. Therefore, from the 2020/2021 tax year, in a scenario where a couple have died and are handing down their main residence to their children, grandchildren or step children, no tax will be payable up to the value of £1m.

If you inherit a property worth between £1m and £2m you will pay 40 per cent tax on the excess value over £1m. This falls to 36 per cent if you agree to donate at least 10 per cent of your estate to charity. Then, once the inheritance is valued beyond £2m, you lose £1 of the main residence allowance for every £2 the value exceeds £2m. This means that an inheritance in excess of £2.35m will receive no allowances whatsoever.


There are several exemptions to inheritance tax and the most important one is, perhaps, the fact that married couples or those in civil partnerships are exempt. Therefore, if your spouse dies and you receive their proportion of your home, the properties you own together or those they owned alone, you do not have to pay inheritance tax, regardless of the value.

People working in certain jobs that carry increased risk, including military personnel, police officers and firefighters are also exempt.

How can we, as a family, legally reduce our inheritance tax?

Although the inheritance tax burden on many families will be reduced or removed completely over the coming years thanks to the government’s new allowances, some families may still wish to reduce their exposure to IHT as much as is legally possible. And the most common way to do this is through gifting.

Many people are unaware that we are all perfectly able to give cash, assets or property away as gifts to ‘exempt beneficiaries’ tax-free providing the giver lives for a further seven years after making the gift. Exempt beneficiaries are usually direct relatives or certain charities and organisations. If you do pass away within seven years of giving the gift, the beneficiaries may have to pay inheritance tax on the gift’s value on a sliding scale.

Gifts can be made by writing a cheque, transferring cash from bank account to bank account or even by signing over assets such as property or vehicles to your beneficiaries.

If the beneficiaries go on to invest the cash you gift them, sell a property for a profit, or even make interest through savings, they may be liable to pay capital gains tax on the profit.

In addition to giving gifts to close relatives, you are able to gift up to £3,000 tax-free each year to anyone at all. You can also give away as many gifts of £250 or less as you wish.

It’s clear to see that the earlier you and your family start to think about inheritance tax planning, the better. Gifts made within seven years of death can still incur inheritance tax charges. Therefore, signing over your property portfolio to your offspring from your death bed isn’t such as great idea. Anyone who has invested in property needs to have an inheritance tax plan from the outset.

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Caroline Ramsey
Caroline reports on property as an investment at Property Notify, with a focus on tax implications. She is an experienced financial reporter, who enjoys explaining the ins and outs of property investment to our readers. Her pieces reflect the high level of interest in property, but they serve as a reminder, to convey the risks and challenges to be found in this market.

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