Inheritance tax on a home: the £500,000 threshold

The two thresholds

GOV.UK states the standard threshold is £325,000: estates below it usually owe no IHT, and the part above is generally taxed at 40%. The GOV.UK thresholds table shows the nil-rate band at £325,000 from 6 April 2009 to 5 April 2031, and the residence nil-rate band (RNRB) at £175,000 from 6 April 2020 to 5 April 2030. The thresholds table still shows the RNRB row ending on 5 April 2030, but the GOV.UK policy paper on the freeze states that the nil-rate band, the residence nil-rate band and the taper are fixed “for the tax years up to and including 2030 to 2031”, so treat 2030 to 2031 as the end of the freeze. An earlier GOV.UK paper on the freeze for 2028-29 and 2029-30 says qualifying estates can pass on up to £500,000, and a surviving spouse’s or civil partner’s qualifying estate up to £1 million.

When the residence nil-rate band applies

The GOV.UK guidance sets out the conditions:

• The home (or a share) must pass to direct descendants: children (including adopted, fostered and step-children), grandchildren or other lineal descendants, or their spouses or civil partners. Nieces, nephews and siblings do not count.
• They must become entitled to it on the death, under a will, intestacy or other legal means. A home held in a trust with conditions, such as an age requirement, does not qualify. A sale by the personal representatives can still qualify if the proceeds go to the descendants.
• The RNRB is capped at the value of the home and applies against the whole estate. It does not apply to lifetime gifts or transfers into trusts.
• Taper: for estates over £2 million the RNRB falls by £1 for every £2 above that level. In GOV.UK’s examples it disappears completely at £2.25 million. The estate value for this test is total assets less debts, without deducting exemptions or reliefs.
• Unused bands can transfer to a surviving spouse or civil partner, though the taper on the first estate can reduce the transferred amount.
• GOV.UK’s guidance says the calculator can handle downsizing and sale cases, but the page does not set out those rules. Read the HMRC guidance or ask a professional.

Who pays the tax, and when

IHT is paid from the estate. GOV.UK says it must be paid by the end of the sixth month after the person died: for a death in January, 31 July. HMRC charges interest if payment is late. A personal representative can pay from the deceased’s accounts, or from their own account and reclaim the money from the estate once probate is granted. The page lists yearly instalments for property but the text I read did not explain the rules, so check HMRC. A home you inherit may have to be sold or mortgaged to pay the tax, so plan with the personal representative.

What this means for a home buyer or owner

• Spouse or civil partner: passing a home to a husband, wife or civil partner incurs no IHT, according to GOV.UK.
• Anyone else (for example an unmarried partner, a nephew): the home counts toward the estate, with no RNRB.
• Charity: a reduced 36% rate applies to some assets if at least 10% of the net estate is left to charity.
• Gifts: tax may apply to gifts above £325,000 made within 7 years of death, with taper relief depending on timing.

Calculation (not an official example): tax is 40% x (taxable estate - available thresholds). With the main figures above, and only if every condition is met, available thresholds are £325,000 + £175,000 = £500,000 for one person before any transfer. Your own figure depends on facts these sources do not cover.

The nations

IHT is a UK-wide tax collected by HMRC. The sources I read describe it for the whole UK and do not distinguish England, Scotland, Wales and Northern Ireland. The rules on who inherits a home in the first place can differ by nation; ask a solicitor in the nation where the home stands. See England, Scotland, Wales and Northern Ireland.

Which professional to consult

A solicitor or a regulated tax adviser can calculate your position and prepare a will. HMRC cannot give tax planning advice. A conveyancer handles the transfer of a home: see conveyancer. Check yourself that any adviser is regulated.