Paying tax on an inherited property

Paying tax on an inherited property

The bulk of a person’s estate is generally made up of property. With the average house costing, around £316,421, (in London the average house costs approximately £594,202) there is the potential that the beneficiaries of the estate can face a hefty Inheritance Tax bill.

The UK government allows citizens to pass property onto their husband, wife or civil partner on death without having to Inheritance Tax. However, if the property is passed onto someone else (siblings, nephews or nieces for instance), the value of the property is included in the estate and inheritance tax may applicable.

How Inheritance Tax is calculated

Inheritance Tax is a tax on the estate of someone who has died. The estate includes things like property, money, possessions and shares.

Inheritance Tax is currently applied to estates whose value is greater than £325,000.

There are ways to avoid paying this tax if the homeowner is prepared to make some sacrifices.

Vacate the property

If the property is gifted away, inheritance tax will not be applied as long as the homeowner moves out and lives in another property for seven years.

If the homeowner insists on staying in the property, they must pay rent at the going rate and cover the cost of bills for a period of seven years.

If the homeowner gives the property away and moves out but passes away before the seven years is up, the property will be treated as a gift and will be subject to the 7-year rule.

What is a gift

HMRC defines a gift as “anything that has a value such as money, property or possessions”. You can ‘gift’ possessions up to the value of £3000 each tax year (6 April – 5 April) without them being added to the value of your estate.

7-year rule explained

If the property was gifted within three years of the homeowner’s death, then Inheritance Tax will be applied at 40%.

If the property was gifted three to seven years before the homeowner’s death, it will be taxed according to the ‘taper relief’.

The taper relief is a sliding scale outlining the percentage of tax that must be paid on assets that were gifted within a specific timescale. These are detailed below:


Years between gift and death

Tax paid
less than 3 40%
3 to 4 32%
4 to 5 24%
5 to 6 16%
6 to 7 8%
7 or more 0%


Kara Copple
An experienced business and finance writer, sometimes moonlighting as a fiction writer and blogger.