2 important aspects of passing a property down as inheritance, explained

18 July 2024

A new study, published by FTAdviser, has found that 46% of high net worth individuals are planning to leave their home to their children as part of their inheritance.

When you form your “estate plan” – the amount of inheritance you wish to leave when you die, and to who – it is important to consider whether you’ll want to include a property or not.

If you do, it may be worth planning for how passing down your family home could alter your loved ones’ tax situation, along with their quality of life, after you’re gone.

With all this in mind, here are three important aspects to consider when planning to pass your home down as part of an inheritance.

1. Passing your home down to the next generation could affect their Inheritance Tax bill

You may be aware that when you leave an inheritance, there are Inheritance Tax (IHT) “nil-rate bands” that outline how much you can pass down tax-efficiently.

Spouses and civil partners are not liable for IHT when receiving assets, but all other beneficiaries are, including your children.

As of the 2024/25 tax year, and fixed at these levels until 2028, the tax-efficient nil-rate bands are as follows:

• The nil-rate band, which applies to everyone bequeathing an estate, stands at £325,000.
• The residence nil-rate band, which only applies to those leaving their main residence to children, grandchildren, or other “direct descendants”, is £175,000.

So: if you passed away and left your home plus any cash and investments to your children or grandchildren, your total nil-rate band (the amount you can pass down without IHT being due) would normally stand at £500,000.

Remember: the residence nil-rate band does not apply to buy-to-let properties, only your main residence, or a home that was once your main residence.

In theory, passing your home down to the next generation should increase the tax efficiency of your estate, as it would benefit from the additional £175,000 residence nil-rate band.

However, adding your family home to your estate will likely boost its value substantially, perhaps dragging a larger portion of your wealth into the taxable bracket.

For instance, if you leave £300,000 in liquid assets as inheritance, your beneficiaries wouldn’t normally pay IHT on this, as the nil-rate band is £325,000. But if you deplete your liquid assets in retirement and leave wealth in the form of your family home, which is worth £600,000, a portion worth £100,000 may be subject to IHT.

This is not to say that leaving liquid assets is “better” than bequeathing a property – it entirely depends on your wider circumstances. Plus, the rules around paying an IHT bill and applying the nil-rate bands are complex, and may require professional guidance.

Here at Depledge, we can help to value your entire estate and break down what this might mean for your estate plan, including your IHT bill.

We’ll look at efficient options for passing down your wealth, including properties, and answer any questions you have about leaving an inheritance.

2. Your beneficiaries will be responsible for your mortgage and other household costs

If you passed away with a home that carried an outstanding mortgage or other loan, your beneficiaries would inherit the debt.

For most, the solution to this problem is to sell the home and repay the mortgage using the equity.

However, if you and your beneficiaries have planned for them to live in the home after you’re gone, they may need to use any liquid assets you’ve left behind to pay the remainder of the debt, leaving them with little non-property wealth.

With all this in mind, it may help to start thinking about:

• Whether your beneficiaries would be able to afford the mortgage on your home if you passed away tomorrow
• If not, how you might leave cash or investments alongside the home to help them keep up with repayments
• How a life cover payout might help them to cover these costs, if you passed away within the policy term
• The ways that other costs might come into the equation, including essential maintenance and Council Tax.

Note that life insurance plans typically have no cash in value at any time and cover will cease at the end of the term. If premiums stop, then cover will lapse. Your home may be repossessed if you do not keep up repayments on a mortgage.

While it is all too easy to focus solely on your loved ones’ potential IHT bill, it is important to pay equal attention to the impact their inheritance could have on their quality of life.

For instance, inheriting a home could be life-changing for your children or grandchildren, but if there are outstanding loans against the property, this could pose some difficulties for them.

In addition, take the time to consider how leaving a home to multiple beneficiaries could cause conflict if not handled carefully. In this instance, it may be necessary for your beneficiaries to sell your home and divide the proceeds – something which could be emotionally challenging for them.

This is where bespoke estate planning could be invaluable to you and your loved ones.

Where properties are concerned, we can help to ensure that everyone is on the same page, so there are no surprises after you pass away. We’ll help you put provisions in place to pay an outstanding mortgage after you die, if applicable, and support your family throughout.

We’ll then consider your other assets and help you to form an estate plan that your beneficiaries can rely on when the time comes.

Get in touch

To discuss forming a bespoke estate plan with one of our independent financial planners, email info@depledgeswm.com or call 0161 8080200.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

The Financial Conduct Authority does not regulate estate planning or tax planning. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.