As Benjamin Franklin once famously wrote: “In this world nothing can be said to be certain, except death and taxes.” You might think that the former would mean the end of the latter, but alas no. When we die, the loved ones we leave behind may be faced with inheritance tax. Here we take a look at what this is, why we have it, and everything you need to know about inheritance tax on property.
What is inheritance tax?
When you die, the government takes inheritance tax from your estate, which is made up of your property, savings and possessions. The amount due is calculated on the total value of your assets, including investments, shares, cars and payouts from life insurance policies, once any debts and liabilities have been deducted.
Inheritance tax is due if your estate is worth more than £325,000, at a rate of 40% above that amount. So if your total assets are worth £625,000, you pay 40% of £300,000, which is £120,000. There’s nothing to pay if you leave everything over the threshold to your spouse or civil partner though, while you can also leave your assets to organisations such as charities and political parties without any inheritance tax becoming due.
What is the nil-rate band?
From April 2019, the maximum allowance when combining the residence and regular nil-band rate is £475,000 for an individual, and £950,000 for couples. This rises to £500,000 and £1 million in April 2020, with couples passing on their allowance to their surviving partner when they die. This figure is set to rise in line with inflation every year.
Why do we pay inheritance tax?
Energy performance certificates can be organised through an estate or letting agent, while you can also arrange one directly with an EPC provider. You can find one of these in your local area by searching the EPC Register. However you choose your assessor, they’ll survey the property and take things like double glazing, insulation and the construction of your property into account to produce a rating.
Many people think inheritance tax is unfair, and it has been voted as the UK’s least popular tax. We are taxed on our earnings and things like property purchases in the form of stamp duty when we’re alive, and then our loved ones pay again when we die. The issue of direct descendants being the only ones to benefit from the residence relief is highly contentious, while the £325,000 nil-rate band has been in place since 2010, when property prices were much lower.
However, those in favour of inheritance tax – including of course the Treasury, which counts it as a huge source of income – argue that it’s a necessary evil. The tax is said to redistribute wealth, rather than perpetuating inherited wealth by the children of the rich receiving the entire family fortune. It can then be spent on public services which benefit the many rather than the few.
Exemptions to inheritance tax
Married couples and registered civil partners are exempt from inheritance tax, as long they live in the UK. They also get the benefit of their partner’s allowance rolling on to their own when they die. People in certain careers are also exempt if they die in active service, including police, paramedics, firefighters, armed forces and humanitarian aid workers. This exemption also applies if an injury sustained in active service leads to a person’s death later down the line.
Can I give away my property tax free?
It’s possible to give away your property tax free, but it has to be a genuine gift. If you continue to live in your home rent-free until you die, this wouldn’t be a gift and tax would be due upon your death. If you do give your property to someone as a genuine gift, then as long as you live for at least another seven years, no inheritance tax would be due. If you die within that period, there’s a sliding scale for how much tax is due, based on the length of time since you gifted your home.
Gifting money to reduce inheritance tax
The same seven-year rule applies to large gifts of money when it comes to inheritance tax. This can be a good way to reduce a future tax bill on your estate, but the people receiving the gifts need to be aware of the tax implications if you die before the seven years are up. You can give away up to £3,000 each year without the need to pay inheritance tax, while this sum can be rolled over for a maximum of one year if you don’t gift the full amount in the first year. Gifts to charities are also tax-free, as well as gifts for marriages up to a certain amount, depending on your relationship to the couple.
Selling an inherited property?
If you inherit a property and wish to sell it, you should first have the executor transfer it into your name by way of an Assent. The selling process after the Assent is completed is the same as a standard sale, and you can learn more about this when you download our handy conveyancing guide.
Disclaimer: This article is for informal and general advice on inheritance tax.