How To Avoid Inheritance Tax On a Property (UK)?

Are you planning to leave your property to your loved ones? Inheritance tax can cut into their inheritance, forcing them to pay a significant portion to the taxman.

Nobody loves inheritance taxes, and you’re likely wondering how to avoid inheritance tax on property in the UK.

This guide offers 10 steps to minimize inheritance tax on UK property, utilizing available exemptions and reliefs.

What is an inheritance tax?

Inheritance tax is the total tax paid on your estate value, applicable when you die. However, if that value doesn’t exceed the £325,000 threshold, the transfer doesn’t charge inheritance tax. Additionally, you can leave your estate above that threshold to your spouse, civil partner, charity, or community amateur sports club for no IHT. 

If you give away your estate to your children, including foster kids, adopted or stepchildren, and your grandchildren, the threshold increases to £500,000.

Additionally, if you’re married or in a civil partnership and the value of your estate is less than the threshold, the unused part gets added to your partner’s threshold after your death. 

10 Ways to avoid inheritance tax on property in the UK

1. Utilize the Nil Rate Band

Anyone can pass their assets to beneficiaries up to the value of their nil rate band, and avoid paying IHT. Until April 2028, the present nil rate band will remain £325,000. It is available for all individuals and can be set against every asset type on their death. 

In addition, the residence nil rate band introduced in 2017 can also avoid IHT. The present RNRB is £175,000. It can be used only by those passing a qualifying residence to their direct descendants, such as children or grandchildren, but not nephews and nieces, on death. 

If your estate value falls within these allowances, no inheritance tax will be due.

2. Make a Will

Writing a will is a crucial part of inheritance tax planning. Without it, your assets will be distributed according to the intestacy rules and might be subject to inheritance tax. It means less inheritance for your beneficiaries and more wealth for the tax man. 

Here are a few ways how to make a will to minimize tax charges 

• Make a will to leave your estate to a civil partner or your spouse and take advantage of the spousal exemption
• Leave your estate to your children or grandchildren, and you will be entitled to property allowance or residence nil rate band
• Leave estate or money for a UK-registered charity which ensures 100% free from IHT, or leave 10% of your taxable estate to charity and reduce IHT from 40% to 36%

3. Transfer assets to a trust

Another great way to avoid paying inheritance tax is to transfer your assets to a trust. It makes them no longer part of your estate and doesn’t count when valuing estates for IHT. 

However, this is acceptable only when you survive for 7 years after the transfer. Here’s where you need to learn the 7 year rule. If you die within 7 years of gifting your asset to a trust and there’s inheritance tax to pay, the tax due depends on when you gave it. 

For example, if the transfer is made 3 years before your death, IHT is charged at 40%.

However, if these transfers are made between 3 to 7 years before your death, IHT is applied based on a sliding scale called ‘taper relief’. It is applicable only if the total value of gifts made in the 7 years before your death exceeds the £325,000 tax-free threshold. 

Years between gift and death	The rate of tax on the gift
3 to 4 years	32%
4 to 5 years	24%
5 to 6 years	16%
6 to 7 years	8%
7 years and above	0%

4. Making lifetime gifts

Lifetime gifts are a great way to avoid inheritance tax or reduce the amount you need to pay. These can be your money, property, possessions, and anything that has value, and you must give them away while you are alive. But, if you still use that property or get some kind of benefit from it, the gift won’t qualify for exemption.

Here are a few types of allowances you can get on lifetime gifts 

• Annual exemption: You can give gifts of £3000 every tax year without adding them to your estate value. If you didn’t use that last year, you can add it to this year’s allowance, making it a total of £6000. This rollover of annual exemption is eligible for one year.
• Wedding or civil ceremony gifts: Above your annual exemption, you can give away wedding or civil ceremony gifts up to £1,000 for each person. It can increase to £2,500 for grandchildren or great-grandchildren and to £5,000 for your children.
• Small gifts exemption: You can give away unlimited gifts up to £250 per person within a tax year. Make sure you didn’t use any other exemption on that same person in the same tax year. 

However, you must remember the 7-year rule. If you die within 7 years of gifting, inheritance tax is applicable, depending on when you gave away the gift. 

5. Release your equity

Equity release is a good way to reduce your inheritance tax. How? It reduces your asset value and the amount that your beneficiaries will inherit in your will. It is like a mortgage that allows you to access tax-free cash from your home. You can use a home reversion plan or a lifetime mortgage policy. 

For example, with a lifetime mortgage, you can get money from banks or financial institutions against the value of your home or by selling a part of your home at a lower market price. Your heirs can inherit this released amount, or you can use it yourself.

However, this can be a hard decision as the lifetime mortgage rates can be complex. Moreover, the rate of interest you pay can sometimes be more than the IHT amount you are trying to avoid. 

6. Inheritance tax-free allowance for couples 

You qualify for inheritance tax exemption whenever you pass an asset between spouses or civil partners. It is also effective for couples who are separated but not divorced or had their civil partnership dissolved at the time of death.

According to these exemption rules, you can leave your entire estate to a civil partner or spouse without paying IHT, even if the asset value exceeds the nil-rate band of £325,000. 

Additionally, they can inherit your unused nil rate band allowance, which will double their threshold. It allows them to leave an estate of up to £650,000 and pay no IHT. This transfer is only possible for the legal representatives of your spouse or civil partners upon their death. 

Learn how to transfer unused basic threshold for inheritance tax here

7. Maximize your pension allowance 

Pension savings aren’t part of the taxable estate, so they don’t incur IHT when transferred to family or loved ones. 

If you die before age 75, your beneficiaries can inherit the pension fund as a tax-free lump sum. However, if you die after 75 years, your beneficiaries must pay the normal income tax rate while withdrawing any amount from the pension fund. 

But if you don’t spend that amount and keep it in your bank, it can become part of your taxable estate. 

Here are a few considerations on how your money left in the pension account can be inherited by your family or dependents tax-efficiently

• The type of your pension plan 
• You have nominated your beneficiaries to receive the money (Writing a will won’t do)
• Age when you die (it’s tax-free if you die < 75 years)

8. Agricultural property relief and Business property relief

Your beneficiaries can inherit some agricultural property without inheritance tax, either during your lifetime or as per your written will. These properties include land or pasture used to grow crops or to rear animals. Learn more about Agricultural Property Relief here. 

If the property contains a business or business assets, it is included in your estate for calculating inheritance tax. You can use a business relief of 50% or 100% on some business assets while passing it to your heirs. It reduces the value of those assets, resulting in paying less IHT. 

9. Life insurance policy covering IHT

This is the simplest way to cover the unwanted inheritance tax bill. You need to place the life insurance in trust so that it doesn’t become a part of your estate.

Otherwise, the insurance will increase your IHT amount. With this insurance, all your due taxes can be paid, and your beneficiaries don’t need to worry about the bill. It also saves you from the 10-year anniversary charge, which says inheritance tax is payable every 10 years after setting up the trust. 

10. Using a Deed of Variation 

The deed of variation rule allows your heirs to amend your will after your death so that they can re-direct inheritance to someone else by avoiding a large tax bill. This can be a little difficult if you have multiple beneficiaries in the will. 

Anyone who redirects the estate to someone else under a DoV isn’t treated as making a gift, so IHT isn’t applicable to them as lifetime gifts. Additionally, the beneficiary making amendments to your will doesn’t need to survive 7 years to prevent the gifts’ valuation from being added to their estate to calculate inheritance tax. 

DoV can sometimes mean that the IHT payable on the deceased’s estate increases when its value goes over the inheritance tax nil rate band and its assets are redirected from an exempt beneficiary, like a spouse, to a chargeable beneficiary, like children. 

However, it can also decrease if the assets are redirected from a chargeable beneficiary to a surviving spouse or charity or used it to use up the unused nil rate band or transferable nil rate band of the deceased. 

Why choose Pluxa Property for your property investment planning

Pluxa Property has experience of handling property investments for over 12 years and knows every corner of legal and regulatory requirements in the UK.

Our team can arrange a one-on-one strategic call, understand your requirements and budget, and help you plan the best property investment portfolio.

Contact us to book a one-on-one call with our property investment experts.

Frequently Asked Questions

How much can I inherit without paying taxes?

You can inherit £325,000 without paying taxes. Inheriting any assets above that threshold charges a 40% tax. But for spouses, civil partners, and charities, even if the inheritance of assets is over £325,000, it is tax-free. 

Can I avoid inheritance tax by giving my house to my children?

Yes, you can avoid inheritance tax by giving your house to your children. But to get an IHT exemption, you need to move out of the property and not make any kind of benefit from it. Also, you need to survive seven years from the time the gift is made, and it will be removed from your estate. 

How does estate tax differ from inheritance tax?

Estate tax is applicable on the money and property of a person who has died before it is inherited by legal heirs, whereas inheritance tax is paid by beneficiaries who inherit the money and property of the deceased person. 

How much money can a child inherit tax-free?

A child can inherit up to £500,000 tax-free, including adopted, foster, or stepchildren, and the estate worth is less than £2 million. However, you need to move out of the property and live for another 7 years. To use that property, you must pay rent to the new owner, a part of the bills, and live for at least 7 years. Otherwise, it will be considered a ‘gift with reservation’ and will be added to your estate value after death. 

Can inheritance tax be avoided if a property is held jointly?

Yes, you can avoid inheritance tax if a property is held jointly. You can avail of various exemptions and reliefs. The property will be inherited by your spouse or civil partners for free after your death, even if the estate value is above £325,000.