Do I Pay Inheritance Tax on My Parents’ House?

This is one of the most misunderstood points in the whole subject, so let us be clear straight away: as a beneficiary, you do not personally pay inheritance tax on a house you inherit from your parents. In the UK, inheritance tax is a charge on the estate, settled by the executors before anything is passed on. You receive your share after any tax has been dealt with. Our guide to inheritance tax on property sets out how the calculation runs.

Whether the estate owes anything depends on its total value against the available allowances. Each parent has a £325,000 nil-rate band, and up to £175,000 of residence nil-rate band when a home passes to children or grandchildren. Because allowances transfer between spouses, a surviving parent’s estate can often use up to £1 million before any tax bites, which is why many family homes pass with no IHT at all.

It helps to picture the usual sequence. When the first parent dies, everything typically passes to the surviving spouse tax-free, and their unused allowances transfer across. The inheritance tax question then really arises on the second death, when the house and the rest of the estate pass to the children. At that point the executors add up the whole estate, deduct the combined allowances, and apply 40% to whatever is left. Only then is the property distributed, so as a beneficiary you inherit a house on which any tax has already been dealt with.

The figures above assume a home passing to direct descendants so the residence band applies. If your parents were unmarried, or the property does not go to children, the residence band may be lost and the sums change. Our answer on the inheritance tax threshold explains how the bands combine.

How the bill actually gets paid

A practical worry for many families is finding the cash, because inheritance tax is generally due within six months of the end of the month of death, often before probate is granted and before the house can be sold. HMRC recognises this squeeze for property. Tax attributable to a house or land can be paid in ten equal annual instalments, which can be met from rental income or cleared from the proceeds when the property sells. Interest applies to the outstanding balance.

There is also a chicken-and-egg problem worth understanding. Executors usually cannot access the estate’s bank accounts to pay the tax until probate is granted, yet probate is not granted until the tax is at least under way. In practice the tax on the non-property assets often has to be found first, sometimes from a bank willing to release funds directly to HMRC under the Direct Payment Scheme, sometimes from beneficiaries who lend the money short-term, and sometimes from a life policy written in trust that pays out quickly and outside the estate. This is exactly the kind of cash-flow planning that sensible estate planning tries to solve in advance.

If you want to reduce the family’s exposure

What if you inherit a share, or the home is sold?

Many family homes pass to more than one child, so you may inherit a share rather than the whole house. The estate still settles any inheritance tax first; you then receive your portion of the property, or of the proceeds if it is sold. If you keep the house and later sell it, capital gains tax could apply to any increase in value between the date of death and the date of sale, though the value is re-based to the date of death, so only later growth is in scope. If several of you inherit and one wants to buy the others out, it is worth taking advice on how to structure that fairly.

If your parents are still planning, there is a great deal that can be done, from using the residence band deliberately, to gifting, to life cover written in trust to meet the bill. What almost never helps is signing the house over to the children while the parents keep living in it, as our answer on giving your house to your children explains. For a plan tailored to your family, the inheritance tax planning service can match you with a vetted, FCA-regulated specialist.

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