How Inheritance Tax Affects Property in the UK

PHS Team

14 Jul, 2025

Inheritance tax (IHT) is an important consideration for anyone who owns property in the UK. When someone passes away, their estate, including their home, may have to pay tax if it’s worth more than a certain amount. This amount is called the inheritance tax threshold, which is currently £325,000. 

If the estate is worth less, no tax is due. However, if the amount exceeds this threshold, tax is charged on the excess. There is also an extra allowance called the residence nil rate band, which can increase the tax-free amount if you leave your main home to your children or grandchildren. It’s important to understand how inheritance tax affects property so you can plan and protect your family’s inheritance.

What Is Inheritance Tax?

Inheritance tax (IHT) is a tax charged on the value of a person’s estate when they die. The estate includes everything they own, property, money, possessions, and investments. In the UK, inheritance tax is only payable if the estate’s value is above a certain amount called the inheritance tax threshold, which is currently £325,000. 

There is also an extra allowance called the residence nil rate band, which can increase the tax-free amount to up to £500,000 if you leave your main home to your children or grandchildren. Some exemptions apply, such as leaving assets to a spouse or charity, which can reduce or eliminate the tax bill.

How Does Inheritance Tax Affect Property?

When a person dies, the value of all their assets, including their property, is added together to calculate the total estate value.

Property Valuation for IHT

The property is valued at its market value on the date of death. This valuation is important because it determines how much inheritance tax is due. It applies not only to primary residences but also to rental properties, and even foreign property owned by UK residents. 

Residence Nil Rate Band 

To help families pass on their homes to children or grandchildren, the government introduced the Main Residence Nil Rate Band (MRNRB). This allowance is in addition to the standard £325,000 threshold and can increase the tax-free amount by up to £175,000 per person. For couples, this means a combined allowance of up to £1 million when passing on a home to direct descendants.

To qualify for the RNRB:

• The property must have been the deceased’s main residence at some point.
• The beneficiaries must be direct descendants, such as children, grandchildren, adopted or help children.
• Trusts set up for the benefit of these descendants may also qualify.

How to minimise inheritance tax on property?

Several strategies can help reduce the inheritance tax payable on property:

• Gifting Property: Giving property as a gift during your lifetime can remove it from your estate, provided you survive for seven years after the gift. However, this requires careful planning due to potential Capital Gains Tax and loss of use.
• Using Trusts: Placing property into certain types of trusts can protect it from inheritance tax, especially if done well before death. Trusts like Property Protection Trusts help ensure the property passes to intended beneficiaries with reduced tax liability.
• Charitable Donations: Leaving part of your estate, including property or its proceeds, to charity can reduce the taxable value of your estate since gifts to charities are exempt from IHT.
• Equity Release: Homeowners can unlock the value of their property through equity release schemes, reducing the estate’s value and thus the IHT liability. This option requires careful consideration of costs and impact on the estate.

Upcoming Changes and Considerations in Inheritance tax

From April 2025, UK inheritance tax rules will shift from a domicile-based system to a residence-based system. This means long-term UK residents will be liable for IHT on their worldwide assets, including foreign property. This change makes it even more critical to understand how property assets, both in the UK and abroad, affect inheritance tax.

The Inheritance Tax Threshold 

The inheritance tax threshold (also called the nil rate band) is the amount up to which an estate is not liable for IHT. For the 2024-25 tax year, this is £325,000. If you leave your home to your children or grandchildren, the residence nil rate band can add a further £175,000 to your threshold, bringing the total to £500,000 per person.

If your estate is worth more than £2 million, the RNRB is reduced by £1 for every £2 over this limit, potentially eliminating the allowance.

Exemptions and Reliefs on Inheritance Tax

Several exemptions and reliefs can reduce or eliminate the IHT payable on property:

• Spouse or Civil Partner Exemption: Property left to a spouse or civil partner is exempt from IHT.
• Charity Exemption: Property left to a registered charity is exempt from IHT. If you leave at least 10% of your estate to charity, the IHT rate on the remainder drops from 40% to 36%.
• Business and Agricultural Reliefs: Some business and agricultural properties may qualify for relief, reducing the taxable value.
• Gifts: Gifts made more than seven years before death are generally exempt from IHT. Gifts within seven years may be subject to taper relief, reducing the tax payable.

How to Reduce Inheritance Tax on Property

There are several strategies to reduce the IHT payable on property:

• Make Use of Allowances: Ensure you use both the nil rate band and residence nil rate band where possible.
• Leave Property to a Spouse or Civil Partner: This is IHT-free and allows unused thresholds to be transferred.
• Gift Property Early: Gifting property more than seven years before death can remove it from your estate for IHT purposes.
• Consider Trusts: Placing property in certain types of trusts can help manage IHT, but rules are complex and advice is essential.
• Charitable Legacies: Leaving part of your estate to charity can reduce the overall IHT rate.
• Life Insurance: A policy written in trust can provide funds to pay IHT without increasing the value of your estate.

Inheritance tax can have a important impact on property in the UK, especially as property values rise and thresholds remain static. By understanding the rules around the inheritance tax threshold, making use of available allowances, and planning, you can minimise the tax burden on your loved ones and ensure your property is passed on according to your wishes. 

How PHS Associates Help You

If you are a UK resident looking to understand inheritance tax and how it affects your property and estate, PHS Associates can help you. They offer expert advice on inheritance tax rules, including the inheritance tax threshold and residence nil rate band. Their team assists with estate planning, wills, trusts, and strategies to reduce tax liabilities. With important changes to inheritance tax in April 2025, our guidance is essential to protect your assets and ensure your estate passes smoothly to your loved ones. Contact us by phone at 0208 8611685 or by email at info@phs-uk.co.uk.

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