If there's one tax that has a tendency to catch people out, it's inheritance tax.
But when it comes to property, it's well worth understanding the rules and regulations around inheritance tax given most of us, in our lifetime, will inherit some form of wealth from our relatives.
Inheritance of propertyA huge number of people will inherit property at what is usually a very difficult time - the death of a loved one.
Getting to grips with the inheritance tax process at that time can be difficult, so knowing what to expect well in advance can help, especially if the benefactor wishes to sell the property inherited.
The Nil Rate Band (NRB) is the amount of a person's overall estate that is exempt from Inheritance Tax (IHT).
The NRB in the UK is £325,000 and is fixed currently until 2021.
Traditionally, IHT at 40% would be due on an estate's value over £325,000.
So, if the estate you inherit is worth £525,000 in total, you would pay 40% IHT on £200,000 - a bill of £80,000 (40% of £200,000).
However if you are widowed, a person's share of the NRB can be transferred to the surviving partner, known as Transferable Nil Rate Band (TNRB).
This can double someone's NRB to up to £650,000.
Moreover, changes to IHT made in 2017 also introduced a Residence Nil Rate Band (RNRB) on top of the NRB and TNRB.
The RNRB explainedThe RNRB is essentially an extra allowance meaning people can leave their properties to their family tax free.
In the current 2019-20 tax year, an additional £150,000 of IHT allowance is available for property and this is set to increase again in April 2020 to £175,000.
This means that by 2021, potentially, an individual could benefit from an IHT allowance of £500,000 - or £1m for a couple.
How did we reach those figures for 2021?
* Nil Rate Band: £325,000
* Residence Nil Rate: £175,000
* Total for individual: £500,000
* Total for couple: £1,000,000
There are, however, rules.
To benefit from the RNRB, the property must be passed to a direct descendent - so children, grandchildren, step-children, adopted children or foster children.
The RNRB is not available if a property is passed down to a nephew, niece, cousin, or sibling.
Also, if the total estate is worth more than £2m, the RNRB tapers off by £1 for every £2 above that £2m threshold.
Properties that qualify for the RNRBThe RNRB only applies to one home, which must be included in a person's estate.
They must also have lived in the property at some stage of their life
Inheritance tax giftsIf an estate is passed in its entirety to a spouse (i.e a husband to his wife) then the surviving partner will not need to pay IHT.
They could also claim the deceased's NRB allowance as outlined earlier.
A further way to potentially reduce an IHT bill on death is to gift to children or family.
Essentially, you can gift anything to your children or family of any value - including your home.
But for those gifts to remain free of IHT, you must survive for at least seven years after the gift was made.
It's important to note down any gifts clearly with the value and date they were given - this means the executor of an estate will have an easier job working out what is exempt from IHT and what isn-t.
Also remember: Any gifts to children or family must be genuine gifts.
So, if you gift your home to your children but remain living in it rent-free, you will still be classed as the owner and the property will not be exempt from IHT.
The gift allowanceUp to £3,000 in assets or cash can be gifted to children or family members each tax year without being subjected to IHT.
However, any unused gift allowance can only roll over for one tax year before it is lost.
Many parents choose to gift to their children to help them on to the property ladder and this can be a good way to help boost their deposit.
But the 'Bank of Mum and Dad' as it's commonly known, isn't always a direct route towards reducing an IHT bill, so make sure you seek independent financial advice before gifting.
Other taxes to be aware ofAn estate is only distributed to benefactors after IHT has been paid but heirs could be liable for other taxes depending on what they inherit.
For example, if a rental property is inherited that provides an income to the heir, they could be liable for additional income tax.
And if an inherited property is sold for more than it was worth when the owner died, capital gains tax may be due.
If in doubt, speak with a tax advisor or solicitor.