Do I have to pay inheritance tax on my parents house?

When your parents reach their twilight years, it’s natural to start wondering how to stop the government taking a big bite out of what you could one day inherit. Recent figures show that HMRC raised a record £7.5bn in inheritance tax (IHT) in 2024, illustrating the importance of proper estate planning.

You might owe inheritance tax on your parents’ home if the estate goes over the current thresholds. The rules aren’t the same for a main home and a second or rented property.

Given that the majority of people’s wealth now sits in their home, the days when only the most wealthy needed to concern themselves with such matters are long gone.

In this guide, we take a closer look at IHT to see when it applies, when it doesn’t, and what options you have to reduce this liability. With this knowledge, it becomes easier to keep the tax man’s fingers out of the equation.

When do I start paying inheritance tax on my parents’ home?

When you’re looking into what will happen to your parents’ estate, one of the first questions that naturally comes up is whether you will need to pay a large IHT lump sum if they were to pass their home onto you.

It’s a big concern for many, especially as property values have far outstripped most people’s savings in recent years. The truth is that the tax due depends on the value of their whole estate, not just the house, as well as the person or people it’s intended to be passed on to.

Here’s how it works in simple terms:

• There’s no IHT to pay if the estate is under £325,000
• You get up to £175,000 extra tax-free if the home passes to children/grandchildren
• There’s no tax at all if the property goes to a surviving spouse
• There’s a potential for £1 million tax-free when both parents’ allowances are combined.

So, when people ask what the maximum amount you can inherit without paying taxes is, the answer depends on the allowances available, which can reach up to £1 million for some families.

A useful thing to remember is that IHT looks at everything together - the home, savings, investments and anything else held in your parents’ estate. Once you know the total, knowing whether the property itself pushes things over the line becomes much easier to work out.

So, how is inheritance tax calculated on my parents’ property?

As we touched upon a moment ago, inheritance tax comes down to the value of the whole estate, and it’s the home that often pushes everything closer to that threshold. Once it’s added to your parents’ other savings and assets, you get the magic figure, and here’s what the calculation usually depends on:

• The total value of the estate after any debts are deducted
• Whether the standard £325,000 Nil-Rate Band is available
• Whether the extra £175,000 Residence Band applies
• If the home is being passed to children or grandchildren
• Whether unused allowances can be transferred from a late spouse
• Whether the home’s value pushes the estate above the combined thresholds
• How other assets contribute to the final figure
• Whether anything remains above the allowances to be taxed at 40%

After you’ve considered these aspects, you get a much clearer picture of whether the property creates a tax bill or not. When people ask who is exempt from inheritance tax, the main exemption applies to anything left to a surviving spouse or civil partner.

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Can’t my parents just gift their home to me to avoid inheritance tax?

Many parents think about giving the house to their children during their lifetime. It feels like a simple, tidy way to avoid future tax and keep things straightforward for the family, but gifting a home only works when it’s a true, clean handover with no ongoing benefit to your parents at all.

In simple terms, HMRC treats the property as still theirs if they continue living in it, rely on it or retain any form of control. The moment they benefit from the property, the tax advantage disappears.

Here’s where people are most often caught out:

• If your parents carry on living in the property without paying the full market rent, HMRC classifies this as a " gift with reservation" which keeps the house as part of their estate.
• If they pass away within the first seven years after they’ve gifted you the property, it may still trigger inheritance tax. This is known as the ‘7-year rule,’ which only removes the gift from their estate if they survive the full seven years.
• If you own the home they’re still living in, your own life events (divorce, debt, relationship changes) can all affect a property once it’s legally yours.
• When your parents sign their home over, they lose the legal protection they have as homeowners, which could leave them vulnerable if your circumstances change.

It’s common for families to wonder whether there is a loophole around inheritance tax, but HMRC closes down most attempts, especially when parents continue living in a home they have gifted.

Gifting can work in very specific situations, but experience tells us that it sometimes causes more issues than it solves. For insight into inheriting a home versus bequeathing one, read our guide on inheriting a house after death.

Do I have to pay inheritance tax if my parents gift me their primary residence?

This depends on whether they continue to live in the property:

Gift With Reservation of Benefit (GROB)

If your parents gift you their property but reserve the benefit of living there, it will be counted as part of their estate for Inheritance Tax purposes.

Parents gifting their property and moving to another

If your parents gift you the family home and move out of it, perhaps to a smaller property or retirement apartment, you won't be liable for tax on the family home, subject to the 7-year rule. You'll still be liable for IHT on the new property if their total estate is over the threshold.

Your parents are making you a joint owner

If your parents make you a joint owner of their property, only their share of the property will count toward their estate for IHT, unless they continue to live there alone and pay you no rent on your share (which may be classed as a GROB, see above). If they make you a joint-owner and you move in (to take care of them, for example), then your share would not likely be classed as a GROB.

Do I have to pay inheritance tax if my parents gift me their buy-to-let property?

Gifting the property in full would remove it from the estate for IHT, subject to the 7-year rule. However, this would mean you will receive (and pay income tax on) the rental income. If your parents continued to benefit from the rental income after gifting it to you, it could be classed as a GROB and would remain a part of the estate for IHT.

There are ways for them to share the property with you and reduce the total taxable value of their estate.

Transfer of part of legal or beneficial ownership

Your parent(s) can make you a joint legal and beneficial owner through a Transfer of Equity, or grant you beneficial ownership shares using a deed of trust or deed of assignment.

You would split the rental income according to your shares in the property, and only their share would count toward their estate for IHT. This is risky for them, as you could force a sale against their wishes, and your share might be granted to your spouse in a divorce or dissolution settlement. It could also be threatened if you file for bankruptcy.

Investment portfolio under a Family Investment Company (FIC)

If your parent(s) own multiple investment properties, it may be tax-efficient to purchase them from a company in their name, making you and any siblings shareholders in their property company. Only the value of their shares will count toward their total estate for IHT. This option allows the parents to retain full control during their lifetime by granting no voting rights to the children until their death.

Need help protecting your family's legacy?

Get in touch today, and our experts can give you the practical advice you need. Whether you’re anticipating receiving a parental home or simply planning your estate ahead of time.

• Gifted Transfer of Equity
• Deed of Trust
• Transfer to a limited company
• Wills and estate planning

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