Inheritance Tax on the Family Home

For many the family home forms a sizeable part of their overall Estate. And when it comes to planning for Inheritance Tax it’s vital to consider the impact of any family property. For many families the value of the family home can have a significant impact on any potential Inheritance Tax (IHT) bill.

Does the family home count towards IHT? 

Just as with any asset, the family home counts towards the total value of your Estate. It’s worth noting that the family home in isolation can be enough to tip you into an IHT bill. With the average sale price for UK property in the past 12 months now exceeding £350,000 it’s very usual for the family home alone to attract IHT, especially if no other allowances are used.

What is the IHT on a family home in the UK?

The current UK IHT threshold, known as the Nil Rate Band, is £325,000 per person. This can be applied to any asset including the family home. Gifts to direct descendants can benefit from an additional Residence Nil Rate Band of up to £175,000, as long as the property you leave is one you have lived in – if you have only ever had a portfolio of properties that have been let, they won’t qualify. The Residence Nil Rate Band can also be transferred between spouses, which can create a significant opportunity to reduce IHT bills. For a joint Estate, the potential amount that can be sheltered from IHT by using your Residence Nil Rate Bands increases to £1 million.

Gifting the family home for IHT 

There are several ways to pass on your home to your children and direct descendants within the UK, including gifting, transferring ownership, trusts, or making use of IHT exemptions and reliefs. The first step is to ensure that you accurately value your Estate, so you can decide on what’s possible.

Gifting anything for IHT purposes, including property, is generally subject to the ‘seven-year rule’. This simply means that you must survive for seven years from the date of the gift for it not to fall into the IHT window. Tapering of any IHT begins after you survive for three years. Be aware too that you must not benefit from the property in any way yourself. So, if you continue to live there, and the agreement is that you will do so until your death, you’ll need to pay full market rent for your use of the property or face the full IHT charge.

Setting up a trust for IHT on family home

If you decide to place your family home into trust, which can sometimes be useful if, for example, your descendants are under the age of 18 and unable to hold property themselves, generally there will be a tax charge. Gifts made to trusts attract an immediate 20% IHT bill if the value of the gift is more than the current allowance of £325,000. You also need to be aware of any potential Capital Gains Tax and Stamp Duty Land Tax charges too.

One helpful point is that the Nil Rate Band is refreshed every seven years, so significant gifts can escape IHT during your lifetime.

IHT in action

The Forsyth family

Sally and Henry Forsyth were married with a single adult daughter – Nicola. They owned a family home in Berkshire and held an investment portfolio. When Sally died three years ago, the entire portion of her Estate was left to Henry. A year later Henry died, with the Estate left solely to Nicola. At this stage the family home was valued at £650,000 with the investments totalling £200,000. Nicola was concerned about IHT but thankfully nothing was due, as a result of the allowances available:

Henry’s Residence Nil Rate BandResidence Nil Rate Band from SallyTotal:Henry’s EstateCombined Residence Nil Rate BandTotal:Nil Rate Band – HenryNil Rate Band – SallyTotalAmount chargeable to IHTIHT payable:

The Foster family

Kate and Hugh Foster owned a London property and held a solid portfolio of investments. On Hugh’s death in 2020 the home passed solely to Kate, with no IHT due, given the fact that the couple were married. When Kate died last year, the family home, worth £1.1 million, and the rest of the Fosters’ assets of £900,000, were split equally between the couple’s two sons – James and Michael.

Henry’s Residence Nil Rate BandResidence Nil Rate Band from SallyTotal:Kate’s EstateCombined Residence Nil Rate BandTotal:Nil Rate Band – KateNil Rate Band – HughTotalAmount chargeable to IHTIHT payable @ 40%

Estates worth more than £2 million

As ever there are some limitations. If you and your partner have a larger Estate which is worth more than £2 million (even if your property is worth much less than this) the Residence Nil Rate Band allowance will be reduced by £1 for every £2 that the Estate is valued over £2 million.

Transferring property to the next of kin 

If you are transferring property to your next of kin, then particular allowances apply. Generally, if you leave anything to your spouse or civil partner, there won’t be an IHT bill to pay, as long as they share the same domicile status as you or are UK domiciled. Their allowance also increases by any allowance that you don’t use. This means that a couple can potentially leave up to £1,000,000 tax-free.

Navigating UK IHT – rules for your family home

There are some key figures which it’s useful to bear in mind when you’re planning how the family home might impact your IHT bill.

Tax yearNil-Rate BandResidence Nil-Rate BandTotal for individualsTotal for couples
2020-21 onwards£325,000£175,000£500,000£1,000,000

Advice on IHT on the family home from The Fry Group

If you are concerned about how the family home will impact on your IHT bill, or want to explore the options available to you, we can help. You may also want to understand how overseas property can impact your UK IHT bill.

Would you like to find out more?

We are here to help with your tax planning requirements. For more information, whatever your circumstances, please contact us today.