Inheritance Tax Planning and the Family Home

Inheritance Tax (IHT) is payable at 40% on your taxable estate, after exemptions and allowable deductions. In 2023/2024, the basic nil rate band (NRB) is £325,000. To this may be added any unused NRB relief from the prior death of a spouse or civil partner. This means that there could be a joint NRB of £650,000. 

Most people’s estate includes a property. There is a further relief that may be available in the form of a residence nil rate band (RNRB). This is £175,000 for the 2023/2024 tax year. Your spouse or civil partner has the same allowance, effectively doubling what can be passed on to £350,000. In 2023/2024, a married or civil partnership couple will have up to £1 million worth of nil rate bands available between them.

Crucially, you only qualify for the RNRB if your estate includes a property that you have used as a home at some point in your life. There is also the requirement for the residence to be passed on death to a direct descendant such as a child or grandchild. This is usually specified by the individual’s Will. The RNRB applies to only one home. The good news is that you do not have to have lived in or owned the property for a minimum time – it can be any property you have lived in at some point. 

If your estate is worth more than £2 million, the RNRB additional allowance reduces on a £1 for £2 basis until completely lost at £2.35 million.

Strategies to reduce IHT on the family home

Here are some possible IHT planning points to consider:

1. Ensure that all the available NRB and RNRB can be used. 
2. Ensure the family home does not have to be sold to pay IHT. Use other funds to meet the IHT payable. Furthermore, IHT can be paid by instalments.  
3. Consider how the house is owned. It can be more flexible if the house is owned as “tenants in common.” On the first death, the share can be passed to the children instead of your spouse.
4. Gift your home to others during lifetime, including children. Survive for seven years and the value of the gift is out of your estate. However, if you intend staying rent-free, the gift will revert back to your estate on death (under the ‘gifts with reservation’ rules), so pay a market rent to avoid this.
5. Consider taking advantage of IHT relief’s such as Business Property Relief. Certain investments can qualify for 100% relief from IHT after 2 years of ownership. 

Recommendation

Consider a full review of your estate with a view to reducing IHT. A significant saving can be made by planning now. 

If you would like to discuss how to take advantage of these and other inheritance tax reliefs and exemptions, please contact Brian King, Tax Partner, on 024 7622 1046 or [email protected]