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Inheritance Tax relief on property

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When planning your finances for the future, there are few things likely to be as complicated as your tax liabilities. Inheritance Tax on any property you own is no exception. 

The complexity of the subject makes it one on which independent financial advice is likely to be necessary if you are to manage the liabilities to be borne by your estate when you die. 

This is especially true in the light of HM Revenue & Customs (HMRC) apparently taking a more rigorous approach to raising the tax, receipts for which have surged by almost 23%, to more than £2 billion in the four months since March 2017, according to a report in Health Insurance Daily on the 25th of July.

The rules

The rules on Inheritance Tax and the amount for which you may be liable on any property you own when you die is outlined on the official government website

This explains the current 40% rate of Inheritance Tax which is payable by your estate over and above a basic allowance of £325,000.

If your entire estate is left to your spouse, civil partner or certain charities, however, no Inheritance Tax is payable.

If the home in which you lived is left to your children, any adopted children or grandchildren, there is a further allowance – called Transferable Main Residence Allowance (TMRA) – of £100,000 added to your basic allowance (i.e. a total of £425,000) before it is liable to Inheritance Tax.

But there are additional reliefs and exemptions – relating to gifts, business relief and agricultural relief – which may affect the amount of Inheritance Tax paid by your estate.

As with practically every other source of taxation, Inheritance Tax, the rates it attracts and the allowances available, are subject to change in response to government decisions.

Avoiding Inheritance Tax 

If you want to pass on your family home as a gift to your children, this is one way of avoiding Inheritance Tax.

This needs to be done at least seven years before your death, although you may continue to live in the property provided you pay rent to the new owners – the children to whom you have passed ownership – continue to pay your share of the bills and live there for a minimum of seven years.

A more common way of ensuring that your children eventually inherit the property and avoid the Inheritance Tax liability, however, may be to put the property in trust.

Putting the property in trust again involves a transfer of ownership – in this case to the trust itself. Once done, and with ownership transferred to a trust, the property is no longer part of your estate and, so, typically avoids liability for Inheritance Tax.

Property in trust insurance 

An important consideration when making that transfer, however, is property in trust insurance.

Trustees have a legal duty to ensure that safeguards remain in place for the protection of the property for which they are responsible and this means arranging specialist property in trust insurance which recognises that the home is under the new ownership of the trust.

Property insurance needs to be written in the name of the trust, therefore, and the addresses of trustees and any legal representatives need to be properly identified in all correspondence between the trust and insurers – so that documentation such as renewal notices or any variation in the terms and conditions of the insurance policy reaches the appropriate destination.