Key facts you need to know about inheritance tax and gifting a property

The topic of inheritance tax can often feel like a maze of regulations and thresholds.

In this article, we’ll highlight the essentials of UK inheritance tax rules, property gifting regulations, and the tax implications that come with transferring property. Please note, it’s for general information only and shouldn’t replace professional advice. Always consult a tax expert before making any decisions.

Overview of UK inheritance tax rules

When it comes to inheritance tax (IHT), the UK has a set of rules that determine how much tax is paid when inheriting an estate. Here's a brief summary of what homeowners should know:

• Inheritance tax thresholds: IHT is charged at 40% on the value of an estate above the tax-free threshold, which is £325,000 for the tax year 2025/26. If the estate includes a main residence that will be passed on to direct descendants, an additional 'residence nil-rate band' may apply, potentially increasing the threshold.*
• Transferable nil-rate bands: If you're widowed, the unused portion of your deceased partner's threshold may be transferred to you, potentially doubling the amount you can pass on tax-free.*

There are certain exemptions that you need to be aware of as well, including:

• Gifts to spouses or civil partners, charities, and political parties are typically exempt.
• Gifts that qualify as 'normal expenditure' or small gifts within the annual allowance (£3,000) may not be subject to IHT.*

What counts as a gift?

Now that we’ve covered the basics, you also need to understand what constitutes a ‘gift’:

• Potentially exempt transfers (PETs): Direct gifts made during one's lifetime are known as PETs and can be exempt from IHT if the donor survives for at least seven years after making the gift.*
• Gift with reservation of benefit: If the donor continues to benefit from the property (e.g., living in it rent-free), it may still be considered part of the estate for IHT purposes.*

Capital gains tax and its effect on inheritance

When transferring or gifting a property, it will be treated as making a disposal and capital gains tax (CGT) might come into play. Main homes typically qualify for CGT relief, but second homes or rental properties may incur a CGT charge on any gain in value. The amount of CGT that needs to be paid is based on the property's market value at the time of the gift.*

What regulations do landlords need to take into account?

For landlords, gifting rental properties can have several tax implications. As with other properties, rental properties can be subject to IHT and/or CGT (as mentioned above). Landlords should also be wary of the seven-year rule for PETs and consider the potential for double taxation in some scenarios, where both CGT and IHT could be charged.

Who is exempt from inheritance tax?

There are certain situations where IHT is not applicable:

• Spouses and civil partners typically don't pay IHT on gifts/assets passed between them during their lifetime and whilst permanently living in the UK.
• Estates that fall below the overall IHT threshold or make use of exemptions and reliefs.
• Recipients of gifts that are categorised as PETs, provided the donor survives for seven years following the gift.

In summary, the landscape of inheritance tax in the UK is nuanced and requires careful consideration, especially for homeowners and landlords. Proper understanding and planning can ensure that your assets are passed on to your heirs in the most tax-efficient manner possible.

Please note that the information provided in this article is not financial or tax advice. Always consult a professional adviser to navigate the complexities and make informed decisions based on your unique circumstances.