Understanding how to pass on property through a will can be one of the most significant financial decisions a person makes in their lifetime. While the desire to provide for loved ones is commendable, there’s also the practical matter of taxation that should not be ignored. Without appropriate planning, a substantial portion of your estate could end up with the taxman rather than your intended beneficiaries. In the UK, inheritance tax (IHT) can take a considerable slice, but there are strategies that can be employed to mitigate the burden. This comprehensive guide explores the tax implications of gifting property through a will and provides intelligent, well-informed approaches that can help minimise unnecessary costs while ensuring your wishes are honoured.
Inheritance tax in the UK is levied on a deceased person’s estate if its value exceeds a certain threshold. As of the current rules, the standard inheritance tax threshold is £325,000. Anything above this amount is usually taxed at a rate of 40%. Importantly, this figure can be higher when a residence is left to direct descendants, thanks to the Residential Nil Rate Band (RNRB), which provides an additional tax-free allowance.
Property often represents the largest part of an estate’s value, making it the most exposed asset to taxation. The consequences can be significant. Heirs may be forced to sell beloved family homes just to pay the tax bill. However, with proper planning and legal tools, it’s possible to legally reduce the IHT liability and pass on more of your wealth to your beneficiaries.
One key distinction to make from the outset is between gifting property while alive and passing it on through a will. If you transfer property during your lifetime, it may be considered a potentially exempt transfer (PET). If you survive seven years from the date of the gift, it is usually exempt from inheritance tax altogether.
On the other hand, if you bequeath property through your will, and your estate exceeds the threshold, it could be subject to IHT at the full rate. That said, transferring property during your lifetime is not always feasible or desirable. Some people prefer to retain use of the property or feel that distributing assets early could disrupt family dynamics.
Making use of the allowances and reliefs within your will can reduce or eliminate tax even when gifting upon death. Let’s explore those navigational tools.
Two significant allowances are available when considering passing on property via a will.
The Nil Rate Band is a £325,000 threshold below which no inheritance tax is payable. This band applies to your entire estate, including property, savings, and investments. For example, if your estate qualifies only for this amount, there is no inheritance tax due.
The Main Residence Nil Rate Band came into effect in 2017 to help families pass on homes more easily. This allowance (currently up to £175,000 per person) applies when the family home is left to direct descendants (children, stepchildren, adopted children, or grandchildren). Combined with the standard Nil Rate Band, married couples or civil partners can effectively pass on up to £1 million tax-free.
To qualify for the RNRB, certain conditions must be met. The property must have been your residence at some point, and it must be passed to a direct descendant. If you have no children or grandchildren, this additional relief will not apply.
Married couples and those in civil partnerships enjoy significant tax-related benefits when making provisions in their wills. Transfers between spouses or civil partners are entirely exempt from inheritance tax, regardless of the amount.
Moreover, if one spouse does not fully use their nil rate band upon death, any unused portion can be transferred to the surviving spouse. As a result, when the second partner dies, their estate can benefit from up to £650,000 in tax-free allowance, or £1 million when combined with the RNRB if leaving a main residence to a direct descendant.
This double-use of allowances is an extremely effective planning tool. However, such benefits are not available to cohabiting couples who are not legally married or in a civil partnership, regardless of the length of their relationship or whether they share children. Proper planning becomes especially critical in such cases.
Including trusts in your will can be a versatile method to gift property while controlling how and when beneficiaries receive it. Trusts offer more than mere control; they can have important tax implications depending on their structure.
A discretionary trust, for instance, gives the trustees (often family members or solicitors) the power to determine how to distribute assets among a group of named potential beneficiaries. This can be helpful if the future needs and financial maturity of beneficiaries are uncertain. However, discretionary trusts are subject to their own inheritance tax rules and periodic charges, so careful structuring and legal advice are essential.
An interest in possession trust allows a beneficiary (often a surviving spouse) to receive income or use the property during their lifetime, with the eventual capital passing to another party. These can be especially useful in second marriages or complex family situations. The value of such a trust may still be liable for IHT, but it allows assets to be protected from irresponsible heirs, divorce settlements, or creditors.
Bare trusts, where beneficiaries have absolute rights to the property, pass assets directly and often carry minimal tax burdens. However, they are less flexible and may not be ideal in all circumstances.
For those who own agricultural or business property, specific reliefs can reduce or eliminate IHT entirely. Agricultural Property Relief (APR) and Business Property Relief (BPR) can be extremely favourable when structured correctly in your will.
APR provides up to 100% relief on agricultural land and buildings, including farmhouses if they are of a character appropriate to the property and occupied for agricultural purposes. The property must have been owned and occupied for at least two years before death (or owned for more than seven years and occupied by someone else for agricultural purposes).
BPR, on the other hand, applies to business assets, including shares in unlisted companies or partnerships. Relief up to 100% is available provided the business is trading (not merely holding investments) and has been owned for at least two years. Writing a will that incorporates these assets accurately can ensure these reliefs are used optimally.
Many people own property jointly with another individual, especially spouses or children. There are two types of joint ownership in UK property law: ‘joint tenants’ and ‘tenants in common.’ The way you own property can affect how it passes in your will and its tax treatment.
As joint tenants, when one owner dies, the property automatically passes to the surviving co-owner. It does not form part of the deceased’s estate and therefore cannot be gifted in a will. This can be efficient for spouses, but may undermine other inheritance plans.
In contrast, tenants in common each own a specific share of the property (e.g., 50%). This share becomes part of the individual’s estate and can be specifically bequeathed to chosen beneficiaries in your will. This option provides more flexibility, especially in complex families or when using trusts.
Accidental joint tenancy can frustrate even the best-laid estate plans. Reviewing how property is owned – and formally modifying ownership through a legal process if needed – is an essential step.
Although capital gains tax (CGT) is not payable on property transferred at death, it can be a future issue for beneficiaries. When someone inherits a property, its base value is ‘stepped up’ to the market value at the time of death. If the inheritor later sells the property and it has appreciated in value, CGT may apply on the gains.
While it might seem unrelated during will planning, understanding how gifts now or later could affect CGT for loved ones is important. For instance, gifting property during your lifetime could potentially trigger CGT (if it is not your main residence), whereas gifting through your will avoids that initial charge, though the exposure may reappear later.
Stamp duty, on the other hand, is not payable when a property is transferred by will upon death. This is another reason why death-time gifts, when appropriately planned, may be preferable to lifetime transfers in some situations.
One common pitfall occurs when individuals attempt to gift property during their lifetime but continue to benefit from it – for example, giving a home to children yet continuing to live in it without paying full market rent. HMRC treats this as a ‘gift with reservation of benefit,’ meaning that for tax purposes, the gift has not really left your estate.
To be effective for inheritance tax purposes, any such arrangement must be arms-length. If you do retain the use of the property, it remains part of your estate for IHT calculations unless rent is paid at market rate and all running costs are managed independently by the new owners.
Inheritance tax planning is complex, particularly when it involves property. Tax laws and personal circumstances evolve, sometimes dramatically, over time. The plan that suits you in your 50s might not be optimal a decade later. Professional advice from solicitors, tax advisers, and financial planners is essential for ensuring the will reflects both your intentions and the current legal framework.
It’s also wise to review your will every three to five years, or sooner following major life events – a marriage, birth of a grandchild, divorce, or the acquisition of significant assets. Regular reviews ensure the strategies for passing property remain aligned with your goals.
While not directly linked to taxation, the administrative burden of managing a deceased estate can be eased significantly with good record-keeping and clearly articulated intentions. Maintaining detailed records of property ownership, valuations, legal documentation, and communications about estate plans reduces confusion and speeds up the probate process. It can also help defend your will if it’s challenged.
Additionally, open communication with beneficiaries—where appropriate—can reduce future disputes and emotional distress. Explaining the rationale behind your property gifts can prevent misunderstandings, particularly in families with complex dynamics or unequal distributions.
Passing property through a will is more than a logistical task; it’s a legacy decision that shapes your family’s future. By understanding the tax implications, leveraging key exemptions, and using tools like trusts and tailored ownership structures, you can preserve more of your estate for those you care about.
Thoughtful planning, professional guidance, and periodic review of your will ensure that your property passes as intended, with minimal tax leakage and maximum peace of mind. In the ever-evolving landscape of inheritance law, being proactive is not just wise — it’s empowering.
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