Everything you need to know about how your property is taxed when you pass it on to your heirs, the rules and threshold for the main residence nil-rate band in 2021-22.

Do you pay inheritance tax on your home?  

As with the vast majority of assets, inheritance tax is levied on the property when you pass away.

But thanks to an extra allowance introduced in April 2017, couples can now leave property’s worth up to £1m before paying any tax.

The tax-free amount depends on who you leave the property to, when you pass away and the overall value of your estate.

What is the main residence nil-rate band? 

The main residence nil-rate band is an extra property allowance that allows people to leave their homes to family tax-free.

Under the rules, if you’re passing your home to a direct descendant – either a child or grandchild. Nieces and nephews, or friends, for example, do not qualify.

Not everyone will qualify for the full allowance. if your total estate is worth more than £2m, the extra allowance tapers off, falling by £1 for each £2 above the threshold.

Married spouses and civil partners may be able to apply for the unused allowance of  their deceased partner – meaning they could pass on property worth up to £350,000 tax-free in 2021-22

Inheritance Tax property rates

The increase to the nil-rate band happened gradually between April 2017 and April 2020. The table below shows how the inheritance tax allowance has increased over the past years.

Tax Year Nil-rate band Residence nil-rate band Total for individuals Total for couples
2018-19 £325,000 £125,000 £450,000 £900,000
2019-20 £325,000 £150,000 £475,000 £950,000
2020-21 and 2021-22 £325,000 £175,000 £500,000 £1,000,000

In the year 2021-22 tax year, you’ll be able to pass on £175,000. Your spouse or civil partner has the same allowance, effectively doubling what you can pass on to £350,000.

The property allowance will be layered on top of your inheritance tax allowance, which has been set at £325,000 since 2010. This means that in 2021-22 you can pass on as much as £500,000 tax-free as an individual, or £1m as a couple.

Who can inherit your property tax for free?

The government rules state that only `direct descendants` of people who have died can benefit from the new main residence nil-rate band.

Direct descendants are described as:

  • Children and their spouses or civil partners
  • Grandchildren and their spouses or civil partners
  • Stepchildren
  • Adopted Children
  • Foster Children
  • A child who was under the guardianship of the people passing on their estate.

This means that nephews, nieces, siblings and other relatives will not benefit from the allowance if a home is passed onto them.

Why did the rules change?

The tax-free threshold has stood at £325,000 for many years, but rising property prices have meant more and more people have been pulled into inheritance tax in recent years, with more than £5bn paid in the last take.

To reduce this burden, the new property allowance was introduced to help people leave property to family without being hit with large tax bills.

Crucially, you only qualify for this new allowance if your estate includes a property that you’ve used as a home at some point in your life.