Property inheritance – comment from Kingsley Napley’s Laura Harper

Written by Laura Harper, partner in the Private Client team at Kingsley Napley LLP

A recent article in The Times “Have we reached the peak of property inheritance?” made interesting reading and has ignited a debate amongst economists.

Its premise was that grants taken out including property were slightly down in 2019-20 (73% of grants) compared to the previous two tax years according to HMRC data crunched by Hamptons. And that this showed property transfers from the property rich baby boomer generation, who have benefited from large increases in property values in recent years, to their families may have passed its peak. However other experts such as the Resolution Foundation predicted the UK would not reach peak inheritance until the 2040s.  

My firm is frequently asked by clients how they can pass on the wealth generated by the (often significant) capital increase in the value of their homes to their children most tax efficiently. They are conscious many in the next generation are struggling to get on the property ladder. They often fear the threat of the 40% inheritance tax rate but are also mindful of the ever increasing costs of care which they may require in later life.

There is a difficult balance to find and there are limited options for those that wish to transfer their homes into the names of their children. This is largely due to the “gift with reservation of benefit” rules which prevent the gift of an asset from falling outside of the taxable estate of an individual or couple where they retain some benefit in that same asset.  This would normally arise where a property is transferred but continues to be occupied without a full market rent being paid but it can apply to gifts of furniture or artwork too.  As the property rental rates continue to rise, paying a full market rent (which has to be reassessed on a regular basis) is likely to be available to relatively few baby boomers who are living off their, albeit, generous pensions.

Instead, many will have to consider downsizing and gifting some of the residual capital from their home to their children in the hope that they survive 7 years from the date of the gift in order for this to fall outside of their estate, although tapering relief will apply after 3 years.  Assistance is provided in the form of the Nil Rate Band, the value at which tax is charged at 0%, but this is currently set at only £325,000 and we only know for certain that these rates apply until 2027/28.  There is also the Residence Nil Rate Band which allows an additional amount of £175,000 to pass tax free but only on the condition that the main property (or the proceeds of it) are passed directly to descendants and that the value of an estate does not exceed £2.35 million or £2.7 if a married couple- because the relief is tapered by deduction where the estate is valued at over £2million.  As such, this does little to help those who do not have children of their own or want to set up a trust for their children to ensure some guidance on how the funds should be applied.  

The fact that the Nil Rate Band has been fixed at this level since 2009 means that it has failed to keep up with increasing property prices and is, in part, to blame for the rise in families facing an inheritance tax bill. No doubt economists will continue to run the detailed sums and offer their predictions. However, broadly speaking, the point is that if property prices continue to rise, we may still be some way off the peak of property inheritance.