It’s getting harder and harder to avoid Inheritance Tax being charged on your home on your death.  

Inheritance Tax allowances have been frozen for many years and house prices have kept rising.  

If you are concerned about leaving your children a hefty tax bill then you might want to consider this relatively simple solution.  


Why it’s hard to avoid Inheritance Tax on your home 

For most people, their home is going to be their most valuable asset. Property however is extremely difficult to protect against Inheritance Tax.  

Cash and investments can be moved around and placed in ‘Inheritance Tax friendly’ investments. Property is static and there is not much you can do with it. 

In terms of Inheritance Tax there are two allowances that can be used: 

  1. The Nil Rate Band – No Inheritance Tax is paid on the first £325,000 you are worth.
  2. The Residence Nil Rate Band – An allowance of £175,000 per person can be used on your home providing certain conditions are met.  

The Residence Nil Rate Band is a relatively new allowance whereas the Nil Rate Band allowance has been around for many years.  

The problem is that the Nil Rate Band allowance has actually been frozen since 2009 and will continue to be for the foreseeable future.  

What’s happened to house prices during this time? They have generally risen significantly, meaning more people are getting dragged into paying Inheritance Tax. 

If the Nil Rate Band had increased at the same rate as house prices then it should be around £100,000 more than it is today.  

Inheritance Tax receipts for the government are hitting record levels.  

In June this year HM Revenue and Customs announced that they had received £100 million more in Inheritance Tax for the months of April and May compared to the same period last year. 

In case you are not aware, any part of your estate that is subject to Inheritance Tax will be taxed at 40%. This means your children could end up having to sell your home just to cover the Inheritance Tax bill.  


The simple solution to avoid Inheritance Tax on your home 


Luckily there is a relatively simple solution to save your kids lots of Inheritance Tax.  

The steps to take are as follows:   

  1. Downsize – sell your home and buy something smaller therefore releasing equity and wealth out of property.  
  2. Invest the released equity into your pension. 

This solution not only has huge Inheritance Tax saving benefits, it can also give you an immediate tax saving via Income Tax relief.  

In most cases pensions are not subject to Inheritance Tax so they become a really powerful way to pass your wealth down to the next generation.  

If you are a higher rate tax payer then a £10,000 contribution to a pension only actually costs you £6,000 because you get 40% back in immediate Income Tax relief.  

In terms of pension contribution rules there are limits in what you can do.  

You can contribute a maximum of £40,000 or 100% of gross salary, whichever is lower, in a tax year. This is providing you have not already flexibly accessed your pension benefits and therefore qualify for a lower allowance. 

If your current home is worth a significant amount you might look at these contribution limits and think because of the amount of equity you release it’s not going to give you much of an Inheritance Tax saving, however you could:  

  • Use your spouse’s allowance too and make contributions on their behalf therefore potentially doubling what you could do on your own. 
  • Carry forward up to 3 years of unused pension annual allowance and use this providing you have the gross salary to cover it. Again this could also be done for both of you. 
  • Make company pension contributions if you own a business but don’t have enough salary to cover the contribution. 
  • You could make the pension contributions over a number of years. 

Remember, as soon as you contribute released equity from your move into your pension you have immediately sheltered it from Inheritance Tax. 

Any other savings and investments can also be sheltered from Inheritance Tax using a combination of other solutions like gifting, insurance and investments that qualify for business property relief.  

This frees up your Nil Rate Band along with your Residence Nil Rate Band to be used purely for your new smaller home, meaning your whole estate could be Inheritance Tax free. Job done! 

If you would like to learn more about saving Inheritance Tax please get in touch for a no obligation free 15-minute call where we can outline the savings that can be made.  

Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.