The rules around whether your family would have to pay inheritance tax on your home, if you were to leave it to them in your will, have recently changed. Here we explain the most common eventualities and how you can work out whether you’re able to avoid inheritance tax on your home or not.
When do your children have to pay inheritance tax on your home?
Inheritance tax is charged at a rate of 40% above the threshold of £325,000. Anything below this figure is taxed at 0%. This is referred to as the nil rate band.
The family home allowance and inheritance tax
If your estate includes your home and you have children or grandchildren you’re leaving your home to, you are entitled to an additional tax-free allowance. This is called the “main residence relief” or family home allowance and allows parents to leave an additional £125,000 to their children/grandchildren. This means that as a home owning parent, you would be able to leave £450,000 to your children, without them having to pay any inheritance tax.
It is important to be aware that the family home allowance only applies to parents leaving their estate to their children (including adopted and fostered children as well as step-children) and their grandchildren.
The additional family home allowance will increase by £25,000 per year until 2020, when it will be set at £175,000.
Inheritance tax allowances between two parents
All qualifying parents are entitled to the family home allowance alongside the Inheritance Tax nil rate band. This means that whilst one parent could leave their children or grandchildren £450,000 tax free. If there are two parents they would be able to leave the same figure.
In short, two parents owning a house together could leave the value of the house up to £900,000 to their children or grandchildren, without them having to pay any inheritance tax.
Restrictions on the residence nil rate band
Situations involving the family home allowance and inheritance tax can be quite complicated, so it really is imperative that you involve a solicitor who has the relevant qualifications. (Check whether they are STEP qualified and if you are unsure, ask).
Some of the complications and restrictions that a Wills & Probate Solicitor will be able to help you with include:
- The family home allowance can only apply to one property.
- You must have lived in the property that you are leaving in your will for the family home allowance to apply.
- Your individual family home allowance can be transferred to your spouse or civil partner if you die first.
- If you choose to gift your property to a child or grandchild rather than leaving your property in your will, there will be no tax-free allowance (and your child/grandchild may still have to pay inheritance tax, depending on considerations such as whether they or you were living in the property at the time). There is more about this below.
Some or all of these points may be of interest to you. If you want to talk any of them through, please give our team a call.
Can I gift my house to my children to avoid paying inheritance tax?
If you choose to gift the family home to your children or grandchildren in your lifetime rather than to leave it to them in your will, there are a number of considerations to be aware of.
How gifting the family home would work
Firstly, if you gift the family home to your children but continue to live there, it will remain part of your estate and so inheritance tax will still have to be paid when you die. This is the case regardless of what time in your life you made the gift, unless you pay rent.
To officially pay rent, you would have to determine what the rent for your property would be at market rate and pay this to your children/grandchildren alongside a share of the household bills. This money will be subject to income tax for your children/grandchildren.
The only exception to these rules is where you gift your property to your children and they begin living in the property themselves.
Potential issues with gifting the family home
We would advise that you carefully consider the following points before you consider gifting your family home to your children or grandchildren:
Will inheritance tax change again?
The family home allowance is set to increase in increments until 2021:
- £125,000 in 2018 to 2019
- £150,000 in 2019 to 2020
- £175,000 in 2020 to 2021
After this point, it is anticipated to rise on an annual basis in line with the consumer price index.
Contact a solicitor qualified to give advice on inheritance tax
The solicitors in our Wills, Trusts & Probate team all undergo examinations to become members of STEP (Society of Trust and Estate Practitioners). This equips us with the skills and knowledge required to expertly assist you when considering estate planning or alongside a probate.
To speak to a solicitor today, call us at any of our offices:
Leicester call us on 0116 254 8871.
Hinckley call us on 01455 639 900.
Market Harborough call us on 01858 467 181.
Corby call us on 01536 851050.