How to make sure you can pass your home onto your children - Gareth Shaw

Dear Gareth, Before the pandemic, I had my property valued at more than £1m. We know we’re fortunate, but we’re asset-rich, cash poor – my wife and I have enough to live on from our pensions, but no real savings or any other valuable things.

We’re in our 70s and in good health, and want to make sure we pass our home on to our three children. Supposing the value recovers, will they have to pay inheritance tax?

Name and address supplied.

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Gareth says…


We all wish we had a crystal ball when it came to the value of your homes, especially when it forms such a significant part of our wealth and we’re planning our financial future.

Last week, mortgage lender Halifax said that house prices fell by 0.2 per cent in May, the third consecutive month of falls.

Nationwide, another lender, found that house prices had declined at their fastest rate since the 2008 financial crisis.

Whether these reductions are temporary or indicate a longer-term slump remains to be seen.

Some housebuilders and estate agents claim they have seen a rebound in demand since some of the lockdown restrictions, including on buying and selling a property, have been lifted.

But onto your query. There’s some good news here for you – since 6 April this year, individuals have been able to give away up to £500,000 completely free of inheritance tax, so long as that amount includes their family home, and that the recipients are ‘direct descendants’ (i.e. children, grandchildren, step-children etc.).

People in marriages and civil partnerships are allowed to inherit their partners’ unused inheritance tax allowance, as well as any of their assets, free of tax, meaning a married couple can give away up to £1m tax-free.

It’s worth deconstructing this a bit more. Each person can give away £325,000 free of inheritance tax. This is technically known as the ‘nil-rate band’. Anything above this amount is taxed at 40 per cent.

But a new allowance was introduced in 2017 that allowed people to increase the amount they could give away tax-free, as long as the family home was included in their ‘estate’ (essentially, everything that they own). For you and many other people, their home is their most valuable asset.

This new allowance – the ‘residence nil-rate band’ – was designed to lift many more people out of the inheritance tax trap.

It started at £100,000 in 2017; it has risen by £25,000 every year until this year, when it reached £175,000.

Added to the £325,000 nil-rate band you already have, that’s £500,000 you can give away. It’s due to increase every year with inflation from 2021 onwards.

If that aligns with the rate of growth in your property, your children should be shielded from a bill, or at least see the impact of it minimised.

There are a few things you need to know about this allowance. It only applies to one property (if you own more than one), and you need to have lived in it at some point in your life.

If you own more than one home that fit this criteria, the executor of your estate can nominate which one should be used against the inheritance tax property allowance.

There are some people who don’t benefit from it, either. If you have a larger estate, the residence nil-rate band reduces through a process called ‘tapering’. For every £2 that your estate is over £2m, the allowance is reduced by £1. So, if your estate is worth £2.4m, you’ll lose the entire main residence nil-rate band.

Unmarried couples don’t benefit from the potential doubling of the allowance, as they cannot inherit their spouse’s unused allowances.

This means they can give away £500,000 each, but won’t benefit from being able to inherit their partner’s assets (including the property) tax-free.

If you decide to downsize at some point in the future, you’ll still benefit. People who have sold their main home and bought a cheaper property can still benefit from the new allowance.

The executors of your estate will need to work out what’s technically known as your ‘downsizing addition’. This is the amount of the main residence nil-rate band that you would have ‘lost’ by moving to a cheaper home.