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With inheritance tax on property: who has to pay it? when do you have to pay it? and what are the rules about the main residence nil-rate band? We take a look.
Inheritance tax on property can seem complicated. But it’s important to get your head around it. We explain what you need to know.
Just like with the vast majority of assets, when you die, inheritance tax is levied on property. However, in the current system, a couple can leave an estate worth up to £1 million before any inheritance tax is due. But the amount you can pass on depends on the size of your estate, whether it includes your house and who you leave it to – read on to find out more.
When you die, your estate, defined as your property, savings and other assets after any debts and funeral expenses have been deducted, will pass on to your beneficiaries as set out in your will.
But under inheritance tax rules, your heirs could face a tax bill of 40% of your estate for everything above the inheritance tax threshold.
In the 2024-2025 tax year, everyone has a tax-free inheritance tax allowance of £325,000 – this is known as the nil-rate band.
If your estate is below £325,000, then it sits in your “nil-rate band” and no tax is payable.
However, if the value of your estate is above £325,000, everything above that threshold is subject to inheritance tax rate of 40%.
So for example, if David dies leaving an estate worth £750,000, then £425,000 of that will be subject to inheritance tax (unless certain circumstances apply – see below). So David’s beneficiaries must pay tax of £170,000 (ie 40% of £425,000). They will be left with £580,000 (£750,000 minus £170,000).
However there are some exceptions to this rule:
However, there is no inheritance tax payable when inheriting from a dead spouse or civil partner and you will also inherit your spouse’s unused nil-rate band. So if David’s wife Helen dies before him (and does not bequeath assets to anyone else), then her whole nil-rate band passes to David, allowing him to pass on up to £650,000 tax free.
However, if Helen has already bequeathed some assets (such as to children from a previous marriage), then their value will be deducted from the nil-rate band that passes to David.
Note that you pass on a percentage of your nil-rate band, rather than an amount. So if Helen leaves 70 per cent of her nil-rate band unused, David’s will increase by 70 per cent no matter what the nil-rate band is when he dies.
There is also normally no tax to be paid if you leave everything above the threshold to an exempt beneficiary, such as a charity or a community amateur sports club.
You don’t have to make life’s big financial decisions alone. Get the right IFA for you today with our partners at Unbiased.
As we explain above, there is no inheritance tax on property to pay if you pass on a home to your spouse or civil partner when you die. However, if you leave your home to another person it counts towards the value of your estate. However, you may be able to increase the threshold at which inheritance tax is payable as long as you leave it to direct descendants thanks to the ‘Residence nil-rate band’.
The residence nil-rate band is an additional property allowance of £175,000 in the tax year 2024-2025, providing you leave your home to direct descendants including children or grandchildren.
This means an individual dying could pass on assets worth up to £500,000 tax free (£325,000 nil-rate band plus £175,000 residence nil-rate band), if this included their residence passing to their children.
Yes. Married couples and those in civil partnerships can transfer any unused nil-rate band when the first person dies to the survivor. This means a couple could pass on up to £1,000,000 without being liable for inheritance tax.
This table illustrates the potential combined allowance:
| Tax year | Nil-rate band (£) | Residence nil rate band (£) | Total for individuals (£) | Total for couples (£) |
| 2024/2025 | 325,000 | 175,000 | 500,000 | 1,000,000 |
But note that not everyone qualifies for the full allowance. Under inheritance tax on property rules, if your total estate’s value is more than £2m, the additional allowance tapers off and falls by £1 for each £2 above the threshold – read on for more of this.
The inheritance tax on property rules around the residence nil-rate band mean you must pass on your property to a direct descendant. This includes:
Bear in mind the person who inherits the home doesn’t have to be under 18. And direct descendants do not include nephews, nieces, siblings and other relatives.
The residence nil-band rate increased between April 2018 and April 2020:
Inheritance tax property thresholds
| Tax year | Nil-rate band | Residence nil-rate band | Total for individuals | Total for couples |
| 2018-19 | £325,000 | £125,000 | £450,000 | £900,000 |
| 2019-20 | £325,000 | £150,000 | £475,000 | £950,000 |
| 2020-21 onwards | £325,000 | £175,000 | £500,000 | £1,000,000 |
Under inheritance tax on property rules, the residence nil-rate band can only apply to one home. You must have lived in the property at some point in your life and you also must have owned it directly not via trust. If you own more than one property, your estate’s executor can decide which property to use against the residence nil-band rate allowance.
For estates worth more than £2 million, under inheritance tax on property rules, the residence nil-rate band will reduce by £1 for every £2 that the estate is worth more than the £2 million taper threshold, even if the property is left to direct descendants. In the 2024-2025 tax tear, if your estate is worth £2.4m you’ll lose the entire residence nil-rate band.
You don’t have to make life’s big financial decisions alone. Get the right IFA for you today with our partners at Unbiased.
In the October 2024 Budget, the Chancellor announced some changes to the inheritance tax system. As it stands, inherited pensions are not counted for inheritance tax purposes, but will be included from April 2027. It was also announced that inheritance tax relief for farms will be limited to £1 million.
Also, while the current inheritance tax thresholds were due to be frozen until April 2028, the government is extending these threshold freezes by a further two years until April 2030.
No tax is due on any gifts you give if you live for 7 years after giving them – unless the gift is part of a trust. This is known as the 7 year rule. If the person dies within 7 years of giving a gift and there’s inheritance tax to pay on it, the amount of inheritance tax due after your death depends on when you gave it.
Gifts that were given within the 3 years before your death are taxed at 40%. However, gifts given between 3 to 7 years before the donor dies are taxed on a sliding scale known as ‘taper relief’.
| Time between date of gift and date of donor’s death | Inheritance tax rate on the gift |
| 0-3 years | 40% |
| 3-4 years | 32% |
| 4-5 years | 24% |
| 5-6 years | 16% |
| 6-7 years | 8% |
| More than 7 years | 0% |
You can use the government’s online inheritance tax checker to find out an approximate value of the estate and help you decide whether any inheritance tax is due or not. But bear in mind it won’t calculate the amount of inheritance tax owed of tell HMRC about the estate’s final value.
If there’s a will, the executor of the will usually arranges to pay the inheritance tax. While if there isn’t a will, the administrator of the estate who does this.
Inheritance tax can be paid from funds within the estate, or from cash raised from the sale of the assets.
However, most of the tax is paid via the Direct Payment Scheme (DPS). So if the person who died had money in a bank or building society account, the person looking after the estate can request for all or some of the tax due to be paid directly from the account through the DPS.
Inheritance tax must be paid within 6 months of the person’s death. This is not long and catches many people out. Probate (the process of sorting out a persons estate after their death) usually takes at least this long and often longer. The assets may not even be released from the estate by the time the tax falls due. Furthermore, if the main asset is a property (as it usually is), then this may have to be sold to pay the tax. Property sales, alone, can take many months. See our guide to selling a probate house.
HMRC will start charging interest once the six months is up. One option is to pay a portion of the tax within that time, even if the estate hasn’t been fully valued. See Life insurance below for another solution to this problem.
For more information on the probate process and when and how inheritance tax is paid see our guide Probate Explained.
There are a number of ways you can avoid paying inheritance tax altogether. These include:
For more information, read our guide on How to avoid inheritance tax.
For more advice on inheritance tax, find a tax adviser specialising in estate planning through our partners at Unbiased. With more than 27,000 regulated financial advisers, our partners at Unbiased can match you with the right adviser.
You may consider taking out a life insurance policy to pay some or all of an inheritance tax bill in order to make things easier on your family after your death.
It can help protect your home and other assets from needing to be sold to pay an inheritance tax bill.
Most life insurance policies will count as part of the estate unless your policy is written ‘in trust’. This means that any money is paid out to your beneficiaries and not to your legal estate.
For more information, read our guide Do I need life insurance?
If your permanent home, (‘domicile’) is abroad, inheritance tax is only paid on your UK assets, such as bank accounts or property you have in the UK. It’s not paid on ‘excluded assets’ such as foreign currency accounts with a bank or the Post Office or overseas pensions.
However the inheritance tax rules are different if you have assets in a trust or government gilts, or you’re a member of visiting armed forces. It’s a good idea to get specialist advice about inheritance tax on property abroad from an independent financial advisor.
You don’t have to make life’s big financial decisions alone. Get the right IFA for you today with our partners at Unbiased.
Inheriting a house can involve an overwhelming number of decisions to make. Beyond the question of how much tax you owe, you might also be wondering how to put an inherited house in your name, how to treat an inherited house with a mortgage and whether you should keep, rent or sell the house? Our guide on inheriting a house tackles these questions and more.
The information the HomeOwners Alliance provides should be of general assistance to you in managing your home finances. We always recommend that you seek further information from an independent financial adviser.
This depends on the size of your estate and your beneficiaries’ relationships to you. However, there are things you can do to reduce the amount of inheritance tax on property payable. Find out more in our guide on how to avoid inheritance tax.
If the value of your estate is above £325,000, everything above that threshold will be subject to 40% inheritance tax rate. However, there is also a residence nil-rate band, which increases your tax free threshold by £175,000 as long as you pass the property to a direct descendant. Also, there is no inheritance tax payable when inheriting from a dead spouse or civil partner and you will also inherit your spouse’s unused nil-rate band. There are also ways to reduce how much inheritance tax on property is payable, find out more in our guide on how to avoid inheritance tax.
Yes, there are ways that you can legally avoid inheritance tax on property. For example, you may choose to take out a retirement interest only mortgage. Find out more in our guide on how to avoid inheritance tax
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