Do I Pay Inheritance Tax on Property I Live In

Understanding Inheritance Tax

Inheritance Tax is charged on the total value of your estate when you die. Your estate includes property, money, investments, and possessions.

The standard IHT rate is 40% on anything above your available allowances. These allowances include:

The Nil Rate Band (NRB) £325,000 per person.

The Residence Nil Rate Band (RNRB) up to £175,000 per person if you leave your main home to direct descendants such as children or grandchildren.

Together, these can allow up to £500,000 of your estate to pass free of tax. For married couples and civil partners, unused allowances can be transferred to the surviving partner, meaning up to £1 million can potentially pass tax-free.

When the property you live in is subject to Inheritance Tax

Your main residence forms part of your estate when you die, so its value is included in the total calculation. If your estate exceeds your combined allowances, Inheritance Tax may be payable.

Example

Suppose your estate consists of:

Your home worth £600,000

Savings and investments worth £200,000

Your total estate value is £800,000.

If you leave your home to your children, your estate benefits from both the £325,000 Nil Rate Band and the £175,000 Residence Nil Rate Band. That gives you a total allowance of £500,000.

The remaining £300,000 would be taxed at 40%, creating an IHT bill of £120,000.

If you were married, and your spouse had previously passed their allowances to you, the estate could pass tax-free up to £1 million, and no IHT would be due in this example.

What happens if you give away your home before death

Some people gift their property to children during their lifetime to avoid IHT. This can work, but only if you meet specific conditions.

When you give away your home, HMRC treats it as a potentially exempt transfer (PET). If you live for seven years after making the gift, it falls outside your estate and no IHT is due.

However, if you continue to live in the property after gifting it and do not pay full market rent, HMRC will class it as a gift with reservation of benefit.

In that case:

The property remains part of your estate for IHT purposes.

Your beneficiaries will still pay tax on its value when you die.

To remove the property from your estate completely, you must either move out or pay your family full market rent for living there.

Residence Nil Rate Band and direct descendants

The additional Residence Nil Rate Band (RNRB) only applies if your main home passes to a direct descendant. This includes:

Children and stepchildren

Grandchildren

Adopted or fostered children

If you leave your home to someone else, such as a niece, nephew, or friend, the RNRB does not apply. Your estate would then only benefit from the standard £325,000 Nil Rate Band.

The RNRB is gradually withdrawn if your estate is worth more than £2 million, reducing by £1 for every £2 over the threshold.

Downsizing or selling your home before death

If you sell or downsize your home later in life, you may still benefit from the Residence Nil Rate Band. HMRC allows you to claim downsizing relief if you leave assets of equivalent value (such as savings from the sale) to your direct descendants.

This ensures that those who move to smaller homes or assisted living can still make full use of their residential allowance.

Inheritance Tax and jointly owned property

If you own your home jointly with a spouse or civil partner, your share automatically passes to them on death under joint tenancy. This transfer is free from IHT.

When the surviving partner dies, the property’s full value is included in their estate, but both partners’ allowances are combined, potentially doubling the tax-free threshold.

If you own the property as tenants in common, you can leave your share to someone else in your will. This can form part of inheritance planning strategies, but it means IHT may apply depending on your estate value.

How to reduce Inheritance Tax on your home legally

There are several legitimate ways to reduce or eliminate IHT on your property:

Use allowances effectively: Combine the Nil Rate Band and Residence Nil Rate Band where possible.

Leave the home to direct descendants: Ensures the RNRB applies.

Transfer ownership between spouses: This defers IHT until the second partner’s death.

Gift the property early and survive seven years: Removes it from your estate if no benefit is retained.

Consider trusts: In some cases, placing property into a trust can reduce IHT exposure, though this must be structured carefully.

Downsize strategically: Selling your home and gifting surplus funds may be more tax-efficient than gifting the property itself.

It is important to seek professional advice before transferring or restructuring property ownership, as mistakes can trigger unnecessary tax charges or legal complications.

What if the property is your main home and you rent part of it

If you rent out a room or part of your main home, the entire property may still qualify for Private Residence Relief for CGT purposes. However, the rental element has no effect on Inheritance Tax — the home’s full value remains part of your estate.

You may be able to deduct certain liabilities, such as an outstanding mortgage, from your estate’s total value before IHT is calculated.

Paying Inheritance Tax on a property

If your beneficiaries inherit a property that forms part of an estate subject to IHT, the tax is usually paid out of the estate before they receive it.

If the estate lacks sufficient cash, they may need to:

Sell the property to raise funds, or

Use a government-approved scheme to pay IHT in instalments over ten years.

This often applies to estates where most of the wealth is tied up in property rather than liquid assets.

Final thoughts

You may have to pay Inheritance Tax on the property you live in if your estate exceeds the available allowances. While your main home can benefit from the Residence Nil Rate Band, it does not automatically escape taxation.

Careful estate planning — including the timing of gifts, making use of both partners’ allowances, and leaving property to direct descendants — can significantly reduce or eliminate your family’s future tax bill.

For most homeowners, understanding how property fits into the wider estate picture is the key to protecting wealth for the next generation. Professional advice can help you structure your affairs in a way that meets HMRC rules while ensuring your home passes on as tax-efficiently as possible.