Can I keep my house in the family despite an inheritance tax bill?

I would like to leave my house to my grandson, but as it stands he would not be able to pay the inheritance tax.

I wouldn’t want the house to be sold long term because he has kids, but I don’t see any other option.

My house is currently valued between £825,000 and £1 million. Do you have any suggestions for keeping the house in the family?

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Heather Rogers replies: One of the most common problems that can arise when someone passes away is that they have a lot of assets but very little cash.

If, even after applying the deceased’s personal exemptions plus any transfers of exemptions from a deceased spouse (see box below), the value of the estate still owes estate tax, then this bill must be paid from outside the estate.

This can cause financial hardship for the person dealing with the estate, as it means finding money to pay the estate tax before probate is granted and the assets of the deceased are released.

But options are available to address this issue now, both for you and for the ultimate personal representative of your estate, who is usually an executor and/or the person applying for the award of probate.

These are explained below, along with what else you might consider before deciding how to pass on your property to which you are clearly attached.

How do you find the money to pay inheritance tax in advance?

Personal representatives can personally pay estate taxes through a loan to the estate and reclaim it once the assets are sold.

They can also apply for a loan to pay it with the assets of the deceased’s estate as security. Anyone doing this should seek professional advice first, including on interest rates.

It is also possible for individuals to purchase insurance during their lifetime to cover the cost of paying estate taxes, if they believe their estate will be liable.

Help should be sought from a financial advisor on how best to do this, and on the cost and affordability of the policy premiums. Your age at the time will be a factor.

When must inheritance tax be paid?

It must be paid at the end of the sixth month after the death of the person. It is possible to pay inheritance tax in installments if the estate consists of:

– Property

– Unlisted shares/securities

– Listed shares and securities

– Business interests.

In that case, the inheritance tax must be paid in 10 annual installments, the first of which is due at the end of the sixth month after the death of the deceased.

No interest is charged on the first installment, but on subsequent installments. Interest will be charged on the total value of the outstanding tax and on any installments not paid on time.

In addition, when selling the property that allows the inheritance tax to be paid in installments (for example, a house or shares), the full outstanding balance of the tax must be paid.

Keep in mind that getting the probate award can be more difficult in these circumstances, so speak to a lawyer first.

Inheritance tax can also be paid in installments if it can be shown that payment in one installment causes financial problems.

What happens if you donate your home during your lifetime?

A capital gains tax would be levied on the transfer, and inheritance tax may also still be due if you continue to profit from the property.

This is called a ‘gift with reservation of benefits’, whereby the gift is nullified and remains in your estate for inheritance tax purposes.

What else should you consider before bequeathing property to your grandson?

Passing on assets to grandchildren is a good estate tax planning measure as it removes these assets from their parents’ estates.

Adult children may already have equity capital which, when transferred, may give rise to inheritance tax on their estate.

By leaving your house to your grandson, he could claim the ‘residence nil rate band’ exemption of £175,000 in inheritance tax because he is one of your direct descendants, in addition to the ‘zero rate band’ exemption of £325,000.

If you also inherited the benefits from an ex-spouse previously, they would add up to £1 million.

Therefore, if your property is your only real asset, your grandson may not have to pay any inheritance tax at all under current rules.

You also have to consider your own needs. You may need your own property to fund healthcare costs, or you may want to downsize at a later date for health or financial reasons.

If you record the property as a guaranteed inheritance, it could cause problems later on.

The easiest option if your grandson is your principal or sole beneficiary is to leave the appropriate percentage of your estate to him, and if he wants to keep the property when he inherits, he can do so.

Ask Heather Rogers a tax question

Tax expert Heather Rogers answers our readers’ questions

Heather Rogers, founder and owner of Aston Accountancy, is our tax columnist. She is ready to answer your questions on any tax topic – tax codes, estate tax, income tax, capital gains tax and much more.

If you would like to ask Heather a question about tax, please email her at taxquestions@thisismoney.co.uk.

Heather will do her best to answer your message in an upcoming monthly column, but she won’t be able to reply to everyone or correspond privately with readers. Nothing in her answers constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

Please include a daytime telephone number with your message – this will be kept confidential and will not be used for marketing purposes.

If Heather can’t answer your question, so can you read more about help with tax matters here, including resources for free professional advice if you are older and/or on a low income.

You can also get in touch MoneyHelper, a government-backed organization that provides free assistance to the public in financial matters. The number is 0800 011 3797.

Here, Heather shares tips on how to find a good accountant, including when to seek help, hiring the right type of company, and typical costs.