Inheritance Tax When Leaving a House to Children

When a house is left directly to children (or grandchildren and other direct descendants), the estate can potentially benefit from both the standard nil rate band of £325,000 and the residence nil rate band of up to £175,000, giving a combined allowance of up to £500,000 for one person, subject to the conditions being met. For a married couple who can transfer both allowances, the combined household allowance on the second death can be substantial.

This is why many wills that leave a home to children, particularly where the estate is not especially large, do not end up facing any inheritance tax at all. It is only once an estate's total value, not just the house, exceeds the combined available thresholds that tax starts to apply to the excess.

The residence nil rate band tapers away for estates above a set total value threshold, reducing by £1 for every £2 the estate exceeds that figure. This taper applies to the whole estate's value, not just the value of the house, so an estate with a modest home but substantial other assets, savings, investments, a second property, can still lose some or all of the residence nil rate band.

This is a common area of confusion: people assume that because their house is worth less than the residence nil rate band, the allowance is automatically safe, when in fact it is the total estate value that determines whether tapering applies.

Sometimes people want to leave a share of the house to children while allowing a surviving spouse to continue living there, often through a life interest trust. These arrangements can still qualify for the residence nil rate band, but the rules around trusts and this allowance are technical, and not every type of trust preserves the relief in the way people expect.

If you are considering leaving your home to children through a trust structure, rather than outright, it is important to get the drafting right, since a poorly structured trust can inadvertently lose the residence nil rate band or create other unintended tax consequences.

If a house is owned jointly as beneficial joint tenants with a spouse, it will pass automatically to the surviving spouse by survivorship on the first death, regardless of what the will says, meaning the residence nil rate band is not needed on the first death (because the spouse exemption already covers it) but becomes relevant only when the surviving spouse later leaves the house to children.

If the house is owned as tenants in common, each owner's share can be left independently under their own will, which may allow the residence nil rate band to be used on the first death as well as the second, depending on how the will is structured. This is a further reason it is worth checking how a property is owned before assuming how the tax position will work.

Whatever the value of your estate, a will that clearly names who should inherit your home helps ensure your executors can identify which allowances to claim. My Posh Will is an online guided will service for England and Wales, with a single will costing £69 and mirror wills for couples costing £89, both one-off payments with lifetime access.

If your estate is likely to be affected by tapering, involves a trust, or your property is owned in an unusual way, use our suitability check to see whether a solicitor or tax adviser should be involved before you finalise your will.