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Home » Do I have to pay Inheritance Tax on my parents’ house?

Lifetime Planning and Wills
Street of detached houses
Jun 22nd, 2021

At BLB Solicitors, our goal is simple – to deliver you clear, practical legal advice and cost-effective solutions. We hope you enjoy exploring our Blog. If you can’t find what you’re looking for, please do contact us.

Do I have to pay Inheritance Tax on my parents’ house?

With ever-rising house prices, increasingly more estates are becoming liable to Inheritance Tax (IHT). For many people, Inheritance Tax planning has never been more important, helping you to make the most of the available exemptions and allowances.

To discuss lifetime tax planning, Wills or Probate, our Lifetime Planning and Wills Team are available on 01225 755656. Alternatively, you can email them, or complete the Contact Form at the foot of this page.

For most of us, our home is our most valuable asset, and when we die, its value is the primary determining factor as to whether our estate is liable for Inheritance Tax (IHT). With skyrocketing house prices, increasingly more estates are exposed to IHT.

How much is Inheritance Tax UK

The amount of Inheritance Tax payable will depend on the total value of the deceased person’s estate, including (but not limited to) their house, money in the bank, their car, investments, business interests and other property (other land and buildings). Benefits payable under the terms of life insurance policies and pensions are usually written in trust, and, if they are, they are excluded from the IHT calculation.

There will be no Inheritance Tax to pay if:

  • the total value of the estate is below £325,000; or
  • if everything over £325,000 is left to a spouse/civil partner, a charity or a community amateur sports club.

If neither of these exemptions applies, the estate will be liable for IHT at 40% of the total value over the £325,000 threshold (or 36% if at least 10% of the estate’s net value is left to charity).

Inheriting a house from your parents UK

In some circumstances, the £325,000 IHT threshold can be even higher. This is because, since 2015, if a person leaves their home to their children or grandchildren, their estate can benefit from an additional tax-free allowance called the ‘residence nil rate band’, known more commonly as the ‘main residence band’.

The £325,000 basic allowance will still apply, but the estate can utilise an additional allowance of £175,000 if the deceased person left their main residence to their children or grandchildren. In other words, Inheritance Tax may not be payable on the first £500,000 (£325,000 + £175,000) of the estate.

It’s important to note that the main residence allowance only applies if the value of the estate is less than £2 million. On estates valued at £2 million and above, the main residence allowance decreases by £1 for every £2 of the estate’s value over £2 million.

Who pays Inheritance Tax?

For those married or in a civil partnership, the tax-free allowance can be higher still. This is because:

  • assets left to a spouse or civil partner who is living in the UK are exempt from Inheritance Tax; and
  • any allowance not used by the deceased partner passes to the survivor.

Let’s take the example of Mr and Mrs X, whose total assets (including their home) are worth £1 million. Mr X dies first, leaving everything to Mrs X. As this gift is exempt from IHT, both his £325,000 allowance and £175,000 main residence allowance are unused and passed to Mrs X. This means that Mrs X may now have up to £1 million in tax-free allowances.

Inheritance Tax planning

While no two estates are the same, in most cases, there are steps you can take to mitigate exposure to Inheritance Tax, including making lifetime gifts.

Inheritance Tax planning can be complex, but in a time of ever-rising house prices, for many people, it has never been more crucial.

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