Can I gift property to loved ones without paying inheritance tax?

For most people, our home is the most valuable asset we own. Yet it could be the asset that creates a potential inheritance tax liability.

After all, house prices have generally risen significantly over the last couple of decades. Much faster than inheritance tax thresholds have.

  • Back in October 2003, the average UK home was worth £135,054. But by October 2023 it was £287,782.
  • From April 2003 until April 2004, we each had an inheritance tax threshold of £255,000, meaning the price of the average UK home was 53% of someone’s personal threshold.
  • In 2024, we each have a basic inheritance tax threshold of £325,000, meaning the price of the average UK home is now 89% of someone’s main personal threshold.

This makes it more challenging to pass on your wealth, including property, without incurring inheritance tax. Especially in regions where average property prices are much higher than the national average, such as London or the South East.

So what are your options?

The good news is that rule changes might work in your favour. Over the years, the government has rolled out the residence nil rate band allowance, worth £175,000 per person. You can add this extra allowance to your main threshold, and use it to pass on property you live in.

In theory, it means you and your partner can leave behind an estate worth a total of £1 million (£500,000 per person) without paying a penny in inheritance tax, which is great news.

That said, the devil is in the detail. Not everyone can benefit from this extra allowance. It only counts if you pass on your property to a direct descendant, such as your children or grandchildren. If you want to leave your property to a friend, or a nephew or niece, this allowance doesn’t count.

It also can only cover on property that you have lived in. So, if you have other property like a holiday home, this extra allowance can’t be used to pass it on.

Gifting property

If the residence nil rate band isn’t going to cover what you need, you could consider gifting your property to your children now. Passing on the ownership to them, and either moving out (if it's your main home) or paying rent to the new owner at market value.

It’s what’s known as a Potentially Exempt Transfer, or PET. As long as you live for at least seven years after making the gift, the property could be classed as no longer being part of your estate. This means it wouldn’t attract inheritance tax.

If you were unfortunate enough to pass away before the seven years, the potentially exempt transfer would fail and would be liable to inheritance tax at up to 40% in the event that the value exceeded your available nil rate bands.

If you are considering gifting your property you should always take legal advice and you need to be comfortable with the end result.

The bigger picture

If most of your wealth is tied up in property, there might not be a lot you can do to prevent an inheritance tax bill. But the chances are you have other assets too – such as savings and investments.

You may be able to cover the cost of the tax bill your family would have to pay by taking out life insurance. Alternatively there may be other options available to reduce the potential liability such as gifting or setting up a trust.

This is why it’s worth thinking about speaking to one of our financial advisers to plan your legacy. We could help you calculate the value of your estate, to see if your estate is likely to have an inheritance tax liability. You could benefit from personalised recommendations to address this. There’s no pressure to act on the advice. Or up-front fees to pay to hear a recommendation.

There’s no doubt that the long-term rise in property prices is causing more people to think about inheritance tax. There are lots of options available to reduce a potential tax bill. But these options reduce the longer you wait. By starting to make plans, you could reduce the possibility of unexpected surprises, and plan for your loved ones to receive more of what you want them to have.

Ben Smith, Senior Technical Planning Lead

Important information

The Financial Conduct Authority doesn't regulate Trust planning and most forms of Inheritance tax (IHT) planning. Some IHT planning solutions put your money at risk and you may get back less than you invested. IHT thresholds depend on individual circumstances and the law. Tax and IHT rules may change in the future.

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