The Jungle of Inheritance Tax

Only two things in life are certain, as Benjamin Franklin said: death and taxes. These two certainties find an unhappy union in the concept of inheritance tax. 

The liabilities

Let’s examine the tax liabilities before we consider your options for dealing with them. The current tax-free threshold in the UK on an individual’s estate is £325,000. This applies to property, investments, cash or anything that forms part of the deceased’s estate. No tax is payable up to this threshold. Everything above it is liable for tax at 40%. As you can see, at this rate, any value in the inheritance will be heavily reduced, so gifting property can also involve a hefty gift to the Treasury.

For most people, their home will form the bulk of their estate, but since the tax-free threshold has not kept pace with the rise in house prices, the tax burden has gradually increased. The government has made some attempts to ameliorate the effects of this by introducing an additional tax-free allowance. For the year 2020/21, this means the tax-free threshold rises by an additional £175,000 to £500,000. For married couples or those in a civil partnership, the tax-free allowance is transferable, which means the combined allowance is potentially £1 million. The details are here:

This sounds like a generous provision until you realise that it applies only where property is being left to direct descendants, such as children or grandchildren. It does not apply to any other relative, such as cousins, nephews, nieces, siblings, or friends. This means that your options for gifting property under this concession remain limited.


There are measures you can take to avoid the most severe consequences. One is to make a gift of your property to your intended beneficiaries while you’re alive, known as a Potentially Exempt Transfer. If you survive the conferring of this gift by seven years, the property may be excluded from your estate for tax purposes. If you die at some point between three and seven years, the property is subject to taper relief, so it will not attract the full 40% rate.

However, the lifetime transfer must be a genuine one, which means you must either move out of the property or pay a market rent to the new owner.

Second homes, or properties such as holiday lets, will usually be subject to capital gains tax, so you cannot make use of any of the relief available under the inheritance tax regime. Either way, you should get professional advice on gifting property as soon as possible.

It’s never a pleasant subject but it is ultimately unavoidable, so give yourself as much time as possible to plan for the future.

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