Inheritance Tax for Homeowners

in England and Wales

What You Need to Know about IHT (and What You Can Do About It)

Office of The Professional Will Writer Polegate

<—–The Usual Suspect

If you own your home, you could be sitting on a ticking tax time bomb – or at least a potential Inheritance Tax (IHT) bill. With house prices rising over the years, many otherwise “modest” estates are creeping over the IHT threshold, especially in places like East Sussex.

WARNING: if you give too much away and this results in inadequate resources to pay Care Home fees later on, the authorities can claim it was deliberate deprivation and refuse to help.

Here’s what you need to know in plain English.

The Current Inheritance Tax Thresholds (2025 to 2030)

Inheritance Tax is charged at 40% on the value of your estate above your available threshold which is potentially made up of two parts:

  1. The Nil Rate Band (NRB)
  • £325,000 per person – frozen since 2009 and staying that way until 2030 at least.
  • This allowance is transferable between spouses/civil partners, so a couple can potentially pass on £650,000 tax-free.
  • BUT it can be eaten away by lifetime gifts, normally within the 7 years before death, but can be 14.

2.) The Residence Nil Rate Band (RNRB)

  • Up to an extra £175,000 per person if you leave your main home to your direct descendants (children, grandchildren, etc.).
  • Also transferable between spouses – giving a total potential IHT-free allowance of £1 million for a couple.

✅ Tip: You must actually have owned and lived in a property and leave it to direct descendants for the RNRB to apply.

Example

Let’s say Mr and Mrs Smith own a home worth £600,000 and have £300,000 in savings, investments, and life insurance payable to each other. When the second spouse dies, their combined estate is worth £900,000.

They have no inheritance tax to pay if:

  • On the first death, everything went to the spouse.
  • They leave everything to their children or grandchildren.
  • They haven’t used up any of their allowances elsewhere.
  • They are legally married or civil registered.

Strategies to Reduce Your IHT Bill

Here are some of the most common (and legal!) ways homeowners reduce their potential IHT liability:

1. Use Your Allowances Wisely

  • The NRB and RNRB are powerful tools, especially if both partners’ allowances are used in full.

2. Gifting

  • Each of you can gift up to £3,000 a year without it affecting your tax free allowance.
  • Larger gifts may be exempt if you survive seven years – this is known as a Potentially Exempt Transfer (PET).
  • Gifts of up to £250 each can be given by each of you to anyone in the whole world except the folk who got the £3,000 – or any part of it if it is split.
  • Gifts out of surplus income can also be exempt – but good records are essential.
  • Some people take out equity release loans so they can give money away, but it is not an inexpensive option, but sometimes the right thing to do.

3. Trusts

  • Placing certain assets in trust can remove them from your estate – though this area is complex and best tackled with advice. In most cases, it won’t work if it is your home.

4. Charity

  • Leave 10% or more of your estate to charity and your IHT rate on the rest may drop to 36%.

5. Review Your Will

  • Making sure your Will is tax-efficient (e.g. taking advantage of both RNRBs) can make a huge difference.
  • Sometimes, an out-of-date Will inadvertently increases the tax bill, as it used to be a good idea to split the estate in percentages – still a great idea if IHT is not an issue.

6. Life Insurance

  • A life policy written in trust can provide a tax-free lump sum to help beneficiaries pay the IHT bill without selling the home.

7. IHT Saving Investments

  • There are many investments which potentially save IHT of 40% of what you put into them in just 2 years. But they are not really for ordinary people, as not all of them work, and even ones which appear to be very secure can go wrong.

Common Pitfalls

  • Leaving your home to someone who isn’t a direct descendant may mean you lose the RNRB. Many older Wills s
  • Joint ownership of property needs reviewing to make sure it fits your wishes and tax strategy.
  • Second homes or buy-to-let properties don’t qualify for the RNRB.

Final Thoughts

Inheritance Tax planning isn’t just for the super-wealthy. If you’re a homeowner in England or Wales, it’s worth taking stock. A little planning now can save your family tens of thousands – or more – in tax later – why not get in touch on 01323 766 766

Related:

Care Fees Check Fees & Checklist Powers of Attorney Stop Your Home Being Stolen

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