Planning Ahead: Inheritance Tax and Property in the UK
10th July, 2025
Inheritance tax rarely crosses our minds until the moment it hits hard.
For many, property is the cornerstone of their wealth, and when the time comes, an unexpected tax bill can be deeply unsettling.
That’s why understanding inheritance tax and knowing how to protect your estate isn’t just wise, it’s essential.
In this article, we uncover the crucial facts about inheritance tax on property in the UK and reveal practical strategies to safeguard your assets and provide peace of mind for you and your loved ones.
What is Inheritance Tax and How Does it Affect Property?
Inheritance tax (IHT) is a levy on the value of your estate, which includes your home, belongings, savings, and investments, when you pass away.
Currently, estates valued below £325,000 benefit from the “nil-rate band” and pay no IHT. For homeowners, there’s an additional main residence nil-rate band, which can increase this threshold to £500,000 if the property is passed to direct descendants such as children or grandchildren.
However, if your estate exceeds these thresholds, the tax charge can be steep: 40% on the amount above the allowance. And crucially, this tax is usually due within six months of death, with interest accruing on any unpaid balance, meaning delays could prove costly.
➤ Learn how IHT works on overseas property.
How is Inheritance Tax Calculated?
The standard inheritance tax rate is 40%, and it applies to the value of the estate above the threshold.
Example:
➡️ Property value: £600,000
➡️ Tax-free threshold: £325,000
➡️ Taxable amount: £275,000
➡️ Inheritance tax due: £275,000 × 40% = £110,000
Ways to Reduce Your Inheritance Tax Liability
There are several ways to reduce or manage inheritance tax more efficiently.
Here are a few key options to consider:
1 – Gifting a Property Before Death
If a parent or grandparent gifts property to a loved one and survives for more than seven years after the gift, it will generally fall outside their estate for inheritance tax purposes.
However, the person giving the gift may need to pay market rent to the person receiving it. This rent would then be considered taxable income for the recipient.
The person giving the gift may also have to consider capital gains tax on the gift if the property has not been their principal private residence throughout ownership.
If the property is later sold and has increased in value, capital gains tax may apply to the gain, depending on the circumstances.
If the donor passes away within seven years of making the gift, taper relief may apply to reduce the tax due. The rates are as follows:
| Years Between Gift and Death | Tax Payable |
|---|---|
| 3 to 4 years | 32% |
| 4 to 5 years | 24% |
| 5 to 6 years | 16% |
| 6 to 7 years | 8% |
| 7 or more | 0% |
It’s helpful to keep a clear record of gifts received, including the value, date, and the person they were received from.
2 – Transferring to a Spouse or Civil Partner
Assets passed between spouses or civil partners are generally exempt from inheritance tax.
What’s more, any unused portion of the nil-rate band can be transferred to the surviving partner, effectively doubling the threshold to up to £1 million (including the main residence nil-rate band) in some cases.
3 – Placing Property in a Trust
Setting up a trust can sometimes be a way to remove assets from an estate for inheritance tax purposes, depending on the type of trust and the specific circumstances. It’s a more complex area, but one worth exploring with professional advice.
4 – Leaving Part of the Estate to Charity
If at least 10% of the estate is left to a registered charity, the inheritance tax rate on the rest of the estate may be reduced from 40% to 36%. Not only does this support meaningful causes, but it can also reduce the overall tax burden.
Why Planning Now Makes All the Difference
Inheritance tax can feel overwhelming, especially at a time of grief. But with thoughtful preparation, you can turn uncertainty into confidence and protect the wealth you’ve worked hard to build.
Don’t leave your estate and your family’s future to chance. By acting now with inheritance tax planning, you unlock the power to reduce tax bills, ease the burden on your loved ones, and ensure your legacy lives on exactly as you intend.
Ready to Take Control?
Every family’s situation is unique.
Whether you want a personalised review of your estate, help understanding your options, or straightforward advice on reducing inheritance tax, we’re here for you.
Contact your usual adviser today to start a conversation that could save your family thousands tomorrow.
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Terry started life at HM Revenue and Customs before moving to Ashdens and then on to BDO and Chantrey Vellacott, the combination of which has provided Terry with a wide breadth of experience which has proved invaluable when helping a broad range of clients with their tax affairs.
Whether it involves meticulously organising a client’s tax affairs or leveraging his expertise to mitigate their tax exposure, Terry has a passion for delivering tangible results.
