Do I Have To Pay Inheritance Tax On My Parents House UK?

Probate is a legal process which is often needed when a person dies. It gives an individual, or a group of people, the legal authority to deal with a deceased person’s property, money and possessions – known as their ‘Estate’. Probate is not required every time a person dies and examples of this include if the deceased passes all their assets to a surviving husband or wife or owns very little, known as a ‘small estate’. Inheritance tax (IHT) may become an issue when someone dies. It is a one-off tax paid on the value of the deceased’s estate above a set threshold – currently £325,000. The tax is set at 40% of any value over that threshold, reduced to 36% if more than 10% of the estate is given to charity. To work out how much IHT, if any, needs to be paid, the executors of the estate need to add up the value of all of the assets, then subtract any debts, bills and funeral expenses. In this article, do I have to pay inheritance tax on my parent’s house UK, we take a look at the process involved.

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Inheritance Tax Rates

Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died.

There’s normally no Inheritance Tax to pay if either:

• the value of your estate is below the £325,000 threshold
• you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club

If the estate’s value is below the threshold you’ll still need to report it to HMRC.

If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren your threshold can increase to £500,000.

If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die.

The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the threshold. The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will

Do I have to pay IHT on my parents’ house?

As property prices continue to rise, the value of an estate can very easily pass the £325,000 threshold for inheritance tax purposes. The government has acted upon this and introduced an extra allowance in 2017 called the Residence Nil Rate Band (RNRB). This removes some of the value of the house out of the total estate which could mean there is no IHT to pay.

The current figure is set at £175,000 and will rise with inflation. It can only be used on one home in the estate and the house must be in the UK. Combining both allowances means an IHT threshold of £500,000 which may mean no IHT is paid at all.

Husbands, wives and civil partners can already pass on property to each other with no IHT to pay. The RNRB allows you to leave your main residence to your children or grandchildren as long as your estate is worth less than £2m. For estates with a value over £2m, the RNRB gradually reduces by £1 for every £2 that the estate is worth more than £2m taper threshold.

Avoiding IHT

Rather than wait until you are dead to pass on your assets, you might decide to dispose of some of them while you are still alive. There are lots of gifts you can make which can reduce the value of your estate.

You can hand over as much as you want, to anyone you want, in the form of “potentially exempt transfers”. As their name suggests, these are only potentially exempt from IHT. Under the rules, if you live for seven years after making them they are exempt; if you die within seven years they will be added to your estate and, if the estate is worth over £325,000, the gift will attract some IHT

Making gifts can help reduce your bill, but there are other things which will not have an impact.

You cannot, for example, give away your property to your children and continue to live there free of charge to avoid the tax. If you give away the property and move out, it will become exempt after seven years; but if you give away the property and live there, you will be expected to pay market rent – and the owner will need to pay income tax on that rent. Otherwise, the property will be considered a “gift with reservation of benefit” and may still be subject to IHT.

Paying IHT

The tax owed on an estate is calculated by the executors of the will. They must include all of the assets – including relevant gifts made within the last seven years – when they do their sums.

It is their responsibility to pay what is owed within six months of the end of the month in which the person died.

Raising the money to pay the bill may mean cashing in any savings accounts held by the deceased, and/or selling some of the assets in the estate. If money is tied up in property you can arrange for the IHT to be paid in monthly instalments over 10 years – however, there will be interest to pay on top of the IHT.

If you are keen to reduce what needs to be sold, you could consider taking out a life insurance policy to cover it. You will need to have the policy written “under trust” or it will be added to your estate and your relatives will end up paying IHT on the payout. Speak to a financial adviser or insurer to find out how to do this.

How we can help

We have a proven track-record of helping clients draft their wills and deal with probate and inheritance tax obligations. This includes relatively straightforward estates and also complex estates where assets are held all over the world. We will guide you through all the necessary legal due diligence in a comprehensive and timely manner. We firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.

How to Contact our Wills and Probate Solicitors

It is important for you to be well informed about the issues and possible implications of inheritance tax liabilities. However, expert legal support is crucial in terms of guiding you through the often emotional process of probate in a sensitive and supportive manner and help ensure you achieve a positive outcome. To speak to our Wills and Probate solicitors today, simply call us on 0345 901 0445, or allow a member of the team to get back to you by filling in our online enquiry form. We are well known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.

Authored by Ben Posted in News, Private Client Tagged as