Metis AM
Leaving your home to your beneficiaries in your will can be a lovely way to keep this important asset in the family.
Indeed, recent research reported by IFA magazine suggests that around half of high net worth individuals plan to leave a house to their children or grandchildren as part of their legacy.
If this is something you’d like to do, though, it’s important to consider the potential tax implications that inherited property could create. As well as Inheritance Tax (IHT), it may be liable for Capital Gains Tax (CGT) if your child chooses to sell the home at a later date.
This can pose a significant challenge for your loved ones after you pass away. As well as the financial implications, it can create additional emotional stress.
Read on to discover three practical steps you can take to reduce the tax burden your beneficiaries could face on inheriting property from you after you pass away.
1. Make sure you can use the residence nil-rate band
The residence nil-rate band was introduced in 2017 to enable homeowners to leave more of their estate to direct descendants free of IHT.
In 2024/25, the residence nil-rate band is £175,000, and this can be claimed on top of the nil-rate band if you are leaving a property that is, or has been, your home to your children or grandchildren.
However, if your estate is worth more than £2 million, your residence nil-rate band may be subject to a taper, falling by £1 for every £2 above the threshold.
If this is the case for you, it may be helpful to consider how you could reduce the value of your taxable estate so that you are able to claim the residence nil-rate band on the property you wish to pass on to loved ones.
There are a few ways you may be able to do this.
Give financial gifts during your lifetime to reduce the value of your taxable estate
There are several gifting allowances that you can use each tax year that means the gifts are immediately considered outside of your estate for IHT purposes. Any gifts that exceed these allowances may be liable for IHT if you die within seven years of giving them.
Invest in shares that qualify for Business Relief
Shares that qualify for Business Relief can be passed down to beneficiaries on your death and, provided they have been held for a minimum of two years, are not liable for IHT.
An added benefit is that these shares can remain within your estate and be sold if you need access to funds – for example, to pay for later-life care.
It’s important to remember that shares qualifying for Business Relief carry risk, so their value can fall as well as rise.
2. Consider placing assets in a trust
A trust is a legal arrangement that can hold assets such as cash or property outside of your estate, ready for beneficiaries to inherit after you pass away or at a later date.
The trust is usually managed by trustees, and you can give them instructions if you have particular wishes about how the assets are used. This can be helpful if you’d like to pass on assets to young grandchildren, as you can ask their parents to act as the trustees until your grandchildren are old enough to take over.
There are several different types of trust to choose from, including:
- Bare trust, in which the trustee is the beneficiary and is entitled to possession of the assets at any time if they are over the age of 18
- Discretionary trusts, in which the trustees can have a certain amount of influence over how the assets and income of the trust are managed
- Interest in possession trusts, in which you can stipulate that the income from assets in a trust, such as shares, go to a beneficiary
- Mixed trusts, which are a combination of several different types.
Assets that you transfer into a trust are considered “potentially exempt transfers”, so this could help to mitigate an IHT bill if you pass away seven years or more after making the transfer. If you pass away within seven years, IHT may still be payable on the value of the assets in the trust.
Additionally, if you plan to continue living in the house after placing it in a trust, this could be considered a “gift with reservation”, and so may still be counted as part of your estate when you pass away.
Placing property in certain types of trust could also help to mitigate a CGT bill if the trustees or beneficiaries decide to sell the property. In some cases, CGT may not be payable if assets are held in a bare trust or if a beneficiary dies, ending an “interest in possession”.
Setting up a trust can be a complex legal arrangement, so it’s important to consult your financial planner before you proceed. They can advise you on whether a trust is suitable for you and help you ensure you choose the right type of trust for your needs.
3. Set up life insurance to cover your estate’s Inheritance Tax liability
As property values rise, it’s possible that the value of your home might exceed the nil-rate band (£325,000 in 2024/25) and the residence nil-rate band (£175,000 in 2024/25).
Life insurance can offer a helpful solution if your estate is likely to be liable for a sizeable IHT bill. Taking out life insurance means your beneficiaries will receive a payout soon after you pass away, which they could use to cover some or all of the expected tax liability.
It’s important to place the policy in trust to ensure that the payout goes directly to your beneficiaries rather than into your estate. If it were to be paid to your estate, it could add to your taxable assets and, consequently, increase your estate’s IHT bill.
Your financial planner can help you select the most appropriate policy for your needs and place it in a trust to ensure your beneficiaries receive the payout.
Get in touch
To learn more about how we can help you to create a tax-efficient estate plan that enables you to leave a meaningful legacy for your loved ones, please get in touch.
Email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate estate planning, will writing, trusts or tax planning.
Remember that taper relief only applies to gifts in excess of the nil-rate band. It follows that, if no tax is payable on the transfer because it does not exceed the nil-rate band (after cumulation), there can be no relief.
