Inheritance Tax - Inheriting the Family Home
15 April 2019
No Inheritance Tax is deducted from your estate if you were to die and leave your home to your spouse or civil partner in 2019/20.
If you pass it on to anyone else, such as a child or grandchild, it will be subject to Inheritance Tax if the estate value is above the threshold of £325,000, or £650,000 for married couples/civil partners, at the date of death. If the value of the estate is above the threshold, you may have to pay tax on the part of the estate above the threshold at a rate of 40%.
How to mitigate against Inheritance Tax on a Parent’s Home
On 6th April 2017 a new allowance was introduced called the Residence Nil Rate Band (RNRB) which is available when residential property is left to direct descendants. The RNRB was set at £100,000 initially but increases annually by £25,000 until it reaches £175,000 in April 2020.
As of April 2019, with the RNRB worth £150,000 this means the family home worth up to £475,000 (£950,000 if you are married or in a civil partnership) may be passed on without your estate being liable for Inheritance Tax.
Not everyone will be able to take advantage of RNRB as there are a number of conditions, such as a qualifying residential interest, descendants, large estates and downsizing, that apply to RNRB so you will need to take advice.
In order to qualify for RNRB, the property needs to be ‘closely inherited’ i.e. must be passed to direct descendants namely children, grandchildren together with their spouses/civil partners, including their widow(er)/surviving civil partner who has not remarried or entered into a new civil partnership. Direct descendants include a step, adopted or fostered child or a child to which the deceased was appointed as guardian when the child was under 18. Direct descendants do not include nieces, nephews, siblings and other relatives who are not included in the list above.
If an individual, a married couple or civil partners do not have any direct descendants that qualify, they will be unable to use the RNRB allowance.
What if the Family Home is Gifted
If the parents gift the child their house at least 7 years before their death, it will usually not count towards their estate and no Inheritance Tax would be due. If the gift occurred less than 7 years before date of death, there will likely be an Inheritance Tax charge if the total estate exceeds the available allowances.
Inheritance Tax is a complicated area and a wrong move could trigger a wholly avoidable tax charge. It is important you take professional advice in relation to estate planning to minimise your tax liability. If you are a parent or you have just been bequeathed an inheritance please contact one of our directors to discuss your particular circumstances: https://www.dalypark.com/our-team/Directors
You can also find out more about calculating Inheritance Tax by clicking on HMRC guidance https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band