Inheritance Tax planning and your home

Recent research reveals that investors are increasingly looking to their advisors for guidance on how to preserve and pass on wealth. Legacy and succession planning has become an increasingly important part of the service we provide. While positive investment returns are important, we are also here to help you think through your goals in areas such as retirement and estate planning, including how to preserve and pass on wealth to those who matter most to you.

Steady increases in the value of residential property in general, and the private residence in particular, as well as the freezing of the nil rate band since April 2009 mean that more people than ever are in the Inheritance Tax (IHT) net with their main residence often being one of the main contributors. From numerous discussions with clients regarding estate planning it is a source of frustration for them that planning opportunities for their main residence are often limited, so in this article we will run through the main reasons why this is the case, following up in further articles some planning that can be considered during your lifetime and on death.

Given the breadth of this subject, these articles focus on the most important considerations. They are intended to give you a practical understanding and a starting point for discussion with your advisor, rather than a comprehensive legal or tax analysis.

The Office for Budget Responsibility’s (OBR) Economic and Fiscal outlook (EFO) March 2026 forecast IHT receipts of £9 billion in 2025-26, rising to £15 billion (0.4 per cent of GDP) by 2030-31.

It is clear that there will continue to be a high demand for planning with the main residence, particularly where it represents a significant part of the estate, and where there is a strong desire by the homeowner to maximise the amounts received by their beneficiaries.

Of course, if the home is taken out of the IHT net through planning, this will have a significant impact on the IHT receipts, and the Government has therefore put in place legislation which makes effective lifetime planning with the family home very difficult so that IHT revenue can be maintained.

Therefore, you need to know when it is appropriate and when it is not to do IHT planning with your main residence and be aware of any pitfalls in doing so.

Fundamentals

As for all IHT planning, the options for planning with the main residence are:

• planning through lifetime gifts
• planning through the Will
• provision through life insurance.

However, before we can move on to consider the specific options for planning in relation to the main residence, it is necessary to have an understanding of the fundamental legal and taxation issues that need to be understood.

Lifetime gifts

Gift with reservation (GWR) rules: The IHT GWR rules apply to prevent a person from making a lifetime gift that is effective for IHT purposes if they continue to enjoy any benefit from the gift. So, in the context of a gift of a house, if the former owner continues to occupy the house rent free this will, in general, be a GWR. This means that the value of the property continues to form part of the taxable estate of the donor for IHT purposes.

Pre-owned asset tax (POAT): Over the years, many schemes have evolved designed to circumvent the GWR rules.

In order to reduce the appeal of such schemes, the income tax POAT rules were introduced by Finance Act 2004 and effective from 6 April 2005. POAT is an income tax levied on the value of benefits still enjoyed in respect of assets which you gave away. However, the GWR rules are applied before the POAT rules. This means that for most transactions, continued use by the donor is likely to be caught by the GWR rather than the POAT rules. The POAT rules will also not apply where specific legislative exemptions from the GWR rules exist.

Capital Gains Tax (CGT): A gift of a chargeable asset will usually be disadvantageous if the asset is standing at a significant gain and there is a chance that the donor will not survive the seven-year potentially exempt transfer (PET) period. Fortunately, the disposal of a private residence during a person’s lifetime, either by sale or gift, will not normally give rise to CGT because of principal private residence relief.

Planning through your Will

Ownership: Most married couples and civil partners own their house as joint tenants. This means that on the first death the survivor automatically inherits the whole house. Where individuals would like to leave their share of the house to someone other than the other joint owner on first death, the house will need to be owned as tenants in common.

Transferable nil rate band: The introduction of the transferable nil rate band has largely removed the need for Will planning with the main residence on the death of the first of the couple to die. However, as we will see later there may still be situations where it is beneficial.

The Residence Nil Rate Band (RNRB): RNRB was introduced by the Finance (No 2) Act 2015 when a home is passed on death to lineal descendants of the deceased on or after 6 April 2017. The maximum amount of the band now stands at £175,000 and any unused RNRB will be transferable to a spouse or civil partner. For many estates, this may eliminate the need for planning with the main residence altogether, although the additional allowance will be withdrawn by £1 for every £2 that the value of the estate exceeds the taper threshold which has been set at £2 million. However, the RNRB is now frozen at £175,000 and the taper threshold at £2 million, both through to and including 2030/31.

What is important for Will planners is that the RNRB will only be available when a ‘qualifying residential interest’ (an interest in property that has at some time during the period of ownership been occupied by the deceased as a residence) is 'closely inherited' (that is, inherited by lineal descendants or their spouses/civil partners).

Lineal descendants include children, grandchildren and remoter issue, adopted children, stepchildren and foster children. ('Remoter issue' means great-grandchildren and beyond).

While the introduction of the RNRB will have reduced the number of estates liable to IHT, a client’s IHT bill can still increase substantially as a consequence of fairly modest asset growth as long as the nil rate band and RNRB remain frozen. This emphasises the importance of planning and ensuring that clients have considered the impact of the frozen bands on their estate.

Summary

The most obvious evidence of Treasury antipathy to IHT planning involving owner-occupied property is:

• the GWR provisions
• the POAT provisions
• the willingness by HMRC to investigate and litigate.

Consequently, it is generally accepted that a family home should only form part of an IHT planning exercise as a last resort. Wherever possible, it is usually preferable to look towards other asset classes when considering planning of this nature.

Nonetheless, where the family home represents the main asset of the estate and its value exceeds the total nil rate band amount and RNRB available, it cannot be easily ignored where IHT mitigation is a priority. However, IHT planning opportunities involving the family home are limited and the continuous close attention being paid by HMRC to this area of planning means that clients must be particularly alert to new developments and that in each case professional advice should be sought when setting up any IHT planning strategy involving the principal residence. Certainly, no arrangement can ever be guaranteed to remain effective, particularly given HMRC's willingness to investigate and litigate in this area.

This is the first in a three-part series. In the next two articles we will explore some of the options that may help address the IHT challenge created by your main residence.