Inheritance tax could be slashed to zero percent using your home – how to do it

Inheritance tax labelled ‘unfair’ and ‘cruel’ by expert

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When Britons begin the think about inheritance tax and begin to plan, most people would like to find ways in which they can keep most of the wealth they have built up during their lifetime in their family’s hands. However, the reality is that without forward planning, those with even modest-sized estates could see thousands of their hard earned cash go straight to the taxman. Within the rules of inheritance tax, there are ways people can reduce the potential tax liability their family faces when they pass away. 

Currently, a person will pay inheritance tax if the value of their estate is over the threshold of £325,000 per person.

If an estate is worth above this threshold it will be taxed at a rate of 40 percent.

Britons will not have to pay any tax below this. 

As houses are usually the largest/most expensive asset a person may have and can take up the majority of a person’s tax-free threshold. 

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However, Britons are able to pass on their home entirely free from inheritance tax if they give it to a spouse or civil partner when they die. 

People can also top up the threshold with the residence nil-rate band (RNRB) which is currently at £175,000 if they pass on their home to their children or grandchildren. 

Children who are adopted, fostered or stepchildren fall into this category. 

This can increase the inheritance tax allowance to £500,000. 

However, this only applies to “direct descendants” so nieces and nephews, or friends, for example, do not qualify.

To do this, a person must own their home, or a share in it and the estate must also be worth less than £2million. 

If a total estate is worth more than £2million, the extra allowance tapers off, falling by £1 for each £2 above the threshold.

When a spouse passes away, the surviving partner can inherit a person’s unused inheritance tax allowance. 

For a couple combining their allowance and leaving their home to their children or grandchildren, this means they have the ability to pass on an estate of up to £1million. 

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There are ways that Britons can pass on their property whilst they are still alive to cut down the liability for their loved ones when they die.

People can gift their property away if they move out and then live for another seven years, due to what is known as the seven year rule.

According to these rules, gifts given in the three years before death are taxed at the full 40 percent.

Anything given three to seven years before the death is then taxed on a sliding scale known as ‘taper relief’.

The rate drops every two years, with the rate of tax dropping to 32 percent, 24 percent, 16 percent and eight percent. 

If Britons want to continue living in their property after giving it away they will need to pay rent to the new owner at the going rate.

This means that the rent will need to be similar to other local rental properties and cannot be discounted, so people arn’t allowed to give “mates rates”. 

Otherwise, it counts as a “gift with reservation” and will be added to the value of their estate.

A gift with reservation is a gift that is not fully given away because the person making the gift keeps back some benefit for themselves.

Sometimes people do not have to pay rent, which applies when a person has only given away part of their property and if the new owners also live in the house.

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