Do I pay Inheritance Tax on a property I inherit?

Understanding Inheritance Tax

Inheritance Tax (IHT) is a tax on the estate of someone who has died, including their property, possessions, and money. In the UK, IHT is applied to the value of the estate above a certain threshold. For properties, the tax can be significant, given their often high value.

Currently, the standard IHT rate is 40%, but it only applies to the part of the estate above the threshold. Understanding how and when it is applicable can help in planning to minimize the tax burden.

Thresholds and Allowances

As of the latest update, the IHT threshold is £325,000. This is known as the "nil-rate band" and is the amount you can pass on before any tax is charged.

If the estate’s value, including property, exceeds the threshold, 40% tax is due on the amount above £325,000. However, there are additional allowances available that can increase your tax-free allowance.

Property and the Residence Nil-Rate Band

The Residence Nil-Rate Band (RNRB) can increase your IHT threshold if you pass your home to your direct descendants, such as children or grandchildren. In the 2023/2024 tax year, this allowance is up to £175,000.

Combining the RNRB with the standard IHT threshold allows a potential total allowance of £500,000. Couples can double this if both have estates below the threshold and leave their estate to each other.

Transferring Inheritance Tax Allowances

If your spouse or civil partner did not use their entire IHT allowance, you can transfer their unused allowance to your own estate. This transfer can notably increase your own IHT threshold.

It's important to document the unused allowance properly and apply it to reduce the potential taxation on your estate.

Practical Steps to Manage Inheritance Tax

If you inherit a property, it can be advantageous to seek professional advice or consult with an estate planner. They can provide tailored advice on how to manage IHT liabilities.

There are also other ways to reduce your estate’s IHT, such as making lifetime gifts, setting up trusts, or taking advantage of certain reliefs and exemptions.

Paying Inheritance Tax

Typically, the executor of the will handles any IHT liabilities. However, as a beneficiary, it is useful to understand what is expected.

The tax must be paid by the end of the sixth month after the person has died. Property can be complex to value, so ensuring accurate valuation and timely payment is important to avoid penalties.