Millions of parents dream of being able to pass on the family house to the next generation when they die.
But growing numbers of homes are attracting inheritance tax when their owners pass away, leaving loved ones with a bill to pay – and, in many cases, being forced to sell up.
Frozen inheritance tax allowances and rising property values mean that as many as 40 per cent of properties bought in England and Wales last year exceeded the £325,000 that you can pass on free of tax.
That means they would likely result in an inheritance tax bill – even if their value does not rise.
This is up from 13 per cent of properties when the allowance was last increased in 2009, according to new analysis by law firm Shakespeare Martineau.
For most people, their home is their biggest asset and so most liable to attract inheritance tax. But it is also the hardest to give away during your lifetime to minimise a potential bill because, quite simply, you need it to live in.
Tax bill: Growing numbers of homes are attracting inheritance tax when their owners pass away, leaving loved ones with a bill to pay – and, in many cases, being forced to sell up
So what can you do if you want to give away your property – without incurring a tax bill? Leading experts share their top ten tips.
Remember that there is no single answer to managing inheritances. The best option for you will always depend on your own circumstances and wishes and therefore professional advice is key.
1. Sit tight and do nothing
Depending on the value of your assets, you may be able to pass on the family home tax-free without doing a single thing.
Everyone can pass on up to £325,000 of wealth without incurring inheritance tax – or £650,000 for a couple who are married or in a civil partnership.
But if you are handing down a family home to direct descendants, you have an additional allowance known as the residential nil rate band of £175,000.
That means you can pass on a family home worth £500,000 or £1 million for couples.
A taper reduces your residence nil-rate band by £1 for every £2 that the value of your estate is more than £2 million.
Add up the value of your total assets. If they are below these thresholds, your family is unlikely to have to pay a bill.
Anything above your allowance is taxed at a flat rate of 40 per cent. Pensions are currently excluded from your estate for inheritance tax purposes, but this is set to change from April 2027.
2. Sell up and move home
If your estate is likely to attract a bill that you are keen to avoid, the easiest option may be to sell up and move somewhere smaller and cheaper.
But there is little point in making huge changes that would be detrimental to your own life just to save your family a tax bill when you are gone.
After all, even if there is a bill to pay, they will be inheriting hundreds of thousands of pounds tax-free.
Some may also find it consoling that a small percentage of their wealth will go towards general taxation, which funds the likes of schools, hospitals and defence for future generations of Britons – arguably a valuable legacy in itself.
However, if you are rattling around in a large property that no longer suits you, downsizing can be a good option – and frees up cash that can be handed over to loved ones if you choose.
For sale: If you are rattling around in a large property that no longer suits you, downsizing can be a good option
Money is much easier to pass on than property that you live in. If you make a financial gift during your lifetime, it is free from inheritance tax as long as you survive for a further seven years.
If you live for a shorter time than that, the tax is tapered from 40 per cent downwards.
If you are ready to move but are put off because you want your children to inherit their childhood family home one day, check their wishes with them.
Although grown-up children often feel nostalgic towards the home they grew up in, most tend to sell up when they inherit – and would prefer their parents to do what is right for their retirement.
James Ward, a partner at law firm Kingsley Napley, says: ‘People want to stay in places for nostalgia reasons but, actually, it’s perfectly reasonable to look to downsize at some point.
‘I think it’s an excellent way of releasing and gifting money or providing you with a better income and standard of living.’
3. Hand over your property now
You can gift your home to loved ones whenever you like but, unless you do it carefully, it may still be treated as if it were yours for inheritance tax purposes.
For it to be considered a true gift you can no longer use it, which means you will need to find somewhere else to live.
Otherwise, HM Revenue & Customs will view it as a ‘gift with reservation of benefit’ – in other words, a gift with strings attached, which is not really a gift at all.
The only way that you can live in it and not fall foul of this rule is by paying rent to the people you have given it to.
This needs to be done formally just as if it was a commercial arrangement between strangers.
You must pay market rent – and your children who now own the property will need to pay income tax on those payments.
‘You can’t just give a wink and pretend you’re paying the going rate when you’re not,’ says Mr Ward.
‘HMRC is pretty hot on this one – and it’s easy for them to check because anyone who receives market rent on a property needs to declare it on their self-assessment tax return.’
You will need to review the rent at least every couple of years to make sure it rises in line with commercial rates.
And that’s not an end to the obstacles. Once you have given away your home, you have no rights over it whatsoever.
That means that your children are perfectly within their rights to ask you to leave whenever they choose.
Even if you are confident you will never fall out and you trust your children implicitly, there are still dangers.
Julia Rosenbloom, private wealth tax partner at Shakespeare Martineau, says: ‘If your child gets divorced, the house could form part of the divorce settlement.
‘If they get into financial difficulties, the house could be something their creditors could go after.
If they lose mental capacity, someone else could take over their affairs. If they die, they could leave your house to someone else. There are all sorts of things that could go wrong.’
You would need to weigh all this up – and seek good expert advice – before considering going ahead.
4. Share it with your child
If your child lives with you, you can give a proportion of the property to them. For example, you could give them 50 per cent and that element would no longer be considered part of your estate after seven years.
Let’s say you owned a family home worth £1 million and gave your child half. Their £500,000 share would not attract inheritance tax if you survive for another seven years.
That means that only your remaining £500,000 share would be considered part of your estate when calculating the inheritance tax due – and if you have no further assets, no tax may be due at all.
Loophole: If you owned a family home worth £1m and gave your child half. Their £500,000 share would not attract inheritance tax if you survive for another seven years
If you hadn’t made a gift, tax of 40 per cent would be due on the total above your £500,000 allowance for passing on a family home – amounting to a £200,000 bill.
The child does not have to be living there full-time, but you can’t just pretend they live with you.
They need to have a good connection with the property, for example, they will need to pay towards bills and have some other ties, such as receiving post there.
It can work, for example, if the child lives abroad but comes back often and has their base at the family home.
‘Creating an artificial situation is not advisable,’ says Ms Rosenbloom. ‘Saying, for example, that all of your old toys and books and clothes are still in your childhood bedroom is not enough.’
If your child moves out, this set-up – known as ‘common occupation’ – is no longer valid.
5. Use equity release
Another option is to extract value from your home during your lifetime to gift to loved ones. That allows you to gift them some money without losing your home.
However, as interest rates are elevated at the moment, this can prove an expensive way of borrowing.
Your home may also need to be sold when you die to pay the debt, so your children may lose the property anyway unless they can pay it off with other means.
6. Take out insurance
You can take out an insurance product that will pay the inheritance bill your estate is likely to incur when you die.
That will save your loved ones from a bill that could otherwise force them to sell the home – but these products are not cheap.
For example, a 70-year-old non-smoker who wants £100,000 paid out on their death would pay £285 a month, according to figures from NFU Mutual.
The level of cover and the monthly premiums would not increase over time. Someone aged 60 would pay £163.
Adebola Babatunde, a financial planning director at Rathbones, says: ‘The key is to put the policy into a trust so that it doesn’t form part of your estate.
‘That way, it won’t attract inheritance tax and can be paid out to your family immediately on your death without having to wait
for probate.’
7. if widowed, Use a double allowance
If you have been widowed and then remarry, you retain the residential nil rate band of your deceased partner – up to £500,000 – and you and your new spouse have a combined allowance of £1 million.
That means that you could pass on a family home up to £1.5 million free of inheritance tax. If both partners have previously been widowed, their combined allowance is up to £2 million.
The rules here are complex and, as with all of the suggestions here, should be discussed with a professional.
8. Pay off the tax bill in instalments
If your children inherit your house and inheritance tax is payable, they won’t necessarily have to sell the property – even if they don’t have enough to cover the bill.
Sean McCann, a chartered financial planner at NFU Mutual, says: ‘They can choose to pay the tax in ten equal annual instalments.
‘There is interest to pay – currently four percentage points above the Bank of England base rate – but that might still be enough to avoid having to sell.’
9. Give home away – then move
It is worth remembering that the right approach to inheritance may involve several options in combination.
Mr Ward says: ‘It doesn’t have to be all or nothing. For example, someone may want to give away their property to get the clock ticking on the seven years before the gift falls out of their estate for inheritance tax purposes.
‘Then, after a couple of years, the property could be sold and the money goes to the children. So they are only paying rent for a couple
of years. If they’d waited until the property had been sold before they made the…
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