How to save Property inheritance tax in 2020

This article explores how you can save money for inheritance tax purposes, on your main property assuming that you intend to be living in this residence until you die.

Table of contents

How to save Inheritance Tax on your main property

This article explores how you can save money for inheritance tax purposes, on your main property assuming that you intend to be living in this residence until you die. Those who would prefer to read the information can follow on article below which has been written based on this video content.

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The value of your property

The type of planning will depend to a large degree on the actual value of your property. If it is well under half a million pounds, it, therefore, falls inside your allowances for inheritance tax purposes. If the value is higher than this, you will need to explore options to help eliminate the inheritance tax liability.

Historically, property in the UK has grown faster than the allowance for inheritance tax. The reason for that is because the IHT allowance is tied to the Consumer Price Index (CPI) which may go up between 1-1.5% per year. In contrast, property (at least in the southeast of the UK) generally increases by around 3-5% in any given year as demonstrated over the last 20 years.

Understanding the Residence Nil Rate Band

It is important to understand how to use your Residential Nil Rate Band properly. This an additional allowance that was introduced a few years ago, and at this moment it's £175,000 pounds per person.

This is providing you own a property that you live in, and you leave that property to direct descendants which are children, adopted children, and grandchildren. Residence Nil Rate Band does not apply if you chose to leave your property to brothers, sisters, cousins, or anyone else. The only way that you can use this particular allowance is by leaving it to direct descendants.

Ways to reduce the Inheritance Tax liability on your main residence


One option is to downsize from your home. The major benefit of doing this is that you can move to a lower-valued property meaning that you can benefit from the capital which you can then release out of your Estate.

It is important, of course, to remember that it will take seven years for this to fall outside of your estate unless you buy plans which benefit from Business Property Relief.

How do you get rid of the money once you've downsized?

  • Direct gifts as Potentially Exempt Transfers (remembering that takes seven years to enact.)
  • Placing money into Trust with chargeable lifetime transfers – also 7 years
  • Buy exempt assets – Use BPR and needs to be held until death but exempt after 2 years.

It is important that you get full and proper advice on all of these areas.

Equity Release

If you don’t want to downsize, one solution is staying in the house and utilising Equity Release. This has been something that people have been nervous about in the past. This is because if due to compounding interest payable the amount owed is more than the property value a people have been forced from their homes.

These days Safe Home Income Plans avoids that, and even if the interest rates are too high and exceeds the value of the property you can still continue to remain in the property.

If you want to go down this route, we would suggest (depending on health) putting this in place from age 75 onwards. Because of the interest rate on this type of plan, you wouldn’t want it to have it for too long to accumulate large interest, but you need seven years for it to be outside of the Estate. Therefore, age 75 seems a reasonable age in which to consider Equity Release, depending on the value of the property.

Equity Release Types

There is an option to do a different type of Equity Release which just gives you an ongoing income stream meaning that you could just spend the money, and that would reduce your inheritance tax liability.

Obviously, one issue with this is that we can’t exactly predict when we might die and so people who do not need an additional income mostly opt to take out a lump sum of capital and gift the money away.

Equity Release Warning

Be careful of buying Exempt Assets if you take a lump sum Equity Release - it's a very small unknown rule whereby if you borrow money, and then invest in assets which are exempt from inheritance tax, the exemption will not work and will be disallowed by the HMRC.

As always, be careful about the details of any Equity Release plan. Sometimes people get tied into all sorts of things because they haven't read the small print properly. Always take advice.

Lifetime Trusts

This is a mechanism by which you can use Trust planning with your Wills. Your Will would state that when you die, part of your property (£325,000) will go into a Lifetime Trust that you will have already set up.

How the planning works are that if the husband dies first, £325,000 of the home value goes into the Lifetime Trust. The remainder of the house sits in his wife's Estate.

In this instance, there are two potential savings:

1.) The first is where the value of the house increase is likely to exceed the increase in the allowance for inheritance tax (£325,000 growing at around 1% per year). The £325,000 in the Trust is likely to grow faster 93-5% per year. Therefore the gap between the two gives you a saving.

2.) There is also another additional major saving. That is the amount of value of the home that's left in the remaining surviving spouse's Estate is then reduced by 10 to 15%. Why is this? - It's another tiny little anomaly within IHT planning which means that because the home is owned by two separate legal entities, the Trust and the remaining spouse, the value is reduced for inheritance tax purposes. This is because it is usually more difficult to agree on a sale value when an asset is owned by different parties.

Gifting part or all of your main residence away

This is not often something we would advise as it is risky on many fronts.  You can’t give away part or all of your property and continue to live in it without paying market rent. 

Even if you do try and work a way of paying rent to your children (who part own the property) this would mean that they are liable to pay income tax and potentially Capital Gains Tax.  You would need to look carefully at the calculations to see if significant savings are being made using this method.

Final Word

The aforementioned are the main ways of reducing IHT on your main residence but you should ensure you take experienced advice on all of them.If you would like help with your Estate planning or have any questions on inheritance tax, please contact us.

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