06 Apr 2024

Inheritance tax on property

Everything you need to know about how your property is taxed when you pass it on to your heirs, and the rules and thresholds for the main residence nil-rate band in 2024-25

Danielle Richardson

In this article

Do I pay inheritance tax on my home?
Video: what is inheritance tax?
What is the main residence nil-rate band?
Inheritance tax property rates
Who can inherit my property tax-free?
Which properties qualify for the nil-rate band?
Can you give away your property tax-free?
Why did the rules change?

Do I pay inheritance tax on my home?

As with the vast majority of assets, inheritance tax is levied on property when you pass away.

But thanks to an extra allowance introduced in April 2017, couples can now leave property worth up to £1m before paying any tax.

The tax-free amount depends on who you leave the property to, when you pass away and the overall value of your estate.

Video: what is inheritance tax?

Our short video below explains what inheritance tax is, and how the main residence nil-rate band works

What is the main residence nil-rate band?

The main residence nil-rate band is an extra property allowance that allows people to leave their homes to family tax-free.

Under the rules, if you're passing your home to a direct descendant, you can benefit from a £175,000 in tax-free allowance in the 2024-25 tax year.

The allowance only applies if you leave your home to a direct descendant - either a child or grandchild. Nieces and nephews, or friends, for example do not qualify.

Not everyone will qualify for the full allowance. If your total estate is worth more than £2m, the extra allowance tapers off, falling by £1 for each £2 above the threshold.

To find out more, read our section on estates worth more than £2m.

Married spouses and civil partners may be able to apply any unused allowance of their deceased partner - meaning they could pass on property worth up to £350,000 tax-free in 2024-25.

Need help with probate? Download our free checklist from Which? Legal to help you through the process.

Inheritance tax property rates

The increase to the residence nil-rate band happened gradually between April 2017 and April 2020. The table below shows how the inheritance tax allowance has increased over the past few years.

Inheritance tax property thresholds

Tax year	Nil-rate band	Residence nil-rate band	Total for individuals	Total for couples
2018-19	£325,000	£125,000	£450,000	£900,000
2019-20	£325,000	£150,000	£475,000	£950,000
2020-21 onwards	£325,000	£175,000	£500,000	£1,000,000

In the 2024-25 tax year, you'll be able to pass on £175,000. Your spouse or civil partner has the same allowance, effectively doubling what you can pass on to £350,000.

The property allowance will be layered on top of your inheritance tax allowance, which has been set at £325,000 since 2010. This means that in 2024-25 you can pass on as much as £500,000 tax-free as an individual, or £1m as a couple.

Find out more: inheritance tax - thresholds, rates and who pays

Who can inherit my property tax-free?

The government's rules state that only 'direct descendants' of people who have died can benefit from the new main residence nil-rate band.

Direct descendants are described as:

Children and their spouses or civil partners
Grandchildren and their spouses or civil partners
Great-grandchildren and their spouses or civil partners
Stepchildren
Adopted children
Foster children
Children who were under the guardianship of the people passing on their estate.

This means that nephews, nieces, siblings and other relatives will not benefit from the new allowance if a home is passed on to them.

Which properties qualify for the nil-rate band?

The main residence nil-rate band applies to only one home. It must be included in your estate (i.e. counted within the assets you owned directly, not via a trust) and you need to have lived in it at some stage in your life.

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

The good news is that you don't have to have lived in or owned the property for a minimum time - it can be any property you've lived in at some point.

The home doesn't even have to be in the UK, but whether or not your heirs pay UK inheritance tax depends on your 'domicile' at the time of your death.

Estates worth more than £2m

If you have a larger estate, the main residence nil-rate band, and therefore the amount you can pass on tax-free, reduces gradually, known as 'tapering'.

For every £2 that your estate is over £2m, the new property allowance is reduced by £1.

So, if your estate is worth £2.4m in the 2024-25 tax year, you'll lose the entire main residence nil-rate band.

The table below shows the size of estate when the entire nil-rate band is lost.

How the inheritance tax allowance is reduced for estates worth more than £2m

Tax year	Main residence nil-rate band	Size of the estate when all nil-rate band is lost
2018-19	£125,000	£2.25m
2019-20	£150,000	£2.3m
2020-21 onwards	£175,000	£2.4m

Can you give away your property tax-free?

It's crucial that any gift is a genuine gift. If, for example, you give away your home but continue to live in it rent-free until your death, you'll be deemed to be the beneficial owner, and it will still be taxed as part of your estate when you pass away.

The same gifting rules apply to property as other assets. If you give away a home within your lifetime, it will be classed as a potentially exempt transfer, meaning inheritance tax may be charged if you die within seven years of making the gift.

If the gifts are worth less than the £325,000 allowance, they'll be added to your estate to work out your taxable estate.

If they're worth more, then they will use up your tax-free allowance, and you'll be charged a tapered rate on the excess, which depends on how long you live after making the gift.

Find out more: What is life insurance? The different types explained

Inheritance tax rates on gifts above the £325,000 allowance

Time between date of gift and date of donor's death	Effective rate charged on gift
0-3 years	40%
3-4 years	32%
4-5 years	24%
5-6 years	16%
6-7 years	8%
More than 7 years	0%

If you live for at least seven years after making the gift then no tax will be due - and your £325,000 tax-free allowance will not be affected.

If there is a tax bill, the new owner will be liable to pay it.

Find out more: inheritance tax planning and tax-free gifts

Why did the rules change?

The tax-free threshold has stood at £325,000 for many years, but rising property prices meant more and more people have been pulled into inheritance tax in recent years.

To reduce this burden, the property allowance was introduced to help people leave property to family without being hit with large tax bills.

Crucially, you only qualify for this new allowance if your estate includes a property that you've used as a home at some point in your life.

Inheritance tax on property FAQs

If you're single and have a property in your estate, your heirs will benefit from the main residence nil-rate band.

This means you'll have the £325,000 nil-rate band, plus an extra £175,000 in 2024-25.

But unmarried couples will not be able to inherit their partner's unused nil-rate bands which, in effect, doubles the amount that can be passed on.

Married couples and civil partners will now be able to pass on £1m inheritance tax-free, whereas unmarried couples will only be able to pass on £500,000 each.

Keep in mind that married couples and civil partners can inherit from one another tax-free - this does not apply if you're unmarried.

One of the benefits of the inheritance tax changes for property is that 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.

You work this out by calculating the proportion of the nil-rate band you would have received on your original property and your new home. The government has published a number of examples showing how this works.

However, the downsizing addition only really applies if the value of your home when you die is worth less than the main residence nil-rate band at the time of your death.

The executors of your estate have two years following your death to claim your downsizing addition. It would be helpful to make a note of when you sold your home, and what was left after you downsized, so that your executors know exactly what to claim.

In most cases, any property you own overseas will count as part of your estate, so will be subject to the normal inheritance tax rules. In other words, you'll be charged 40% of assets worth more than £325,000.

The rules are different for non-domiciles (people who aren't UK residents for tax purposes), and depend on where they are based, but even they will need to pay UK IHT on their assets in the UK.