Inheritance Tax and Stamp Duty: Estate Planning Considerations
Property ownership structure significantly affects both stamp duty and inheritance tax exposure. IHT thresholds of £500,000 per person (£1m per couple) interact with SDLT in trust purchases, lifetime gifts, and joint ownership arrangements.
Key Takeaways
- •IHT nil-rate band: £325,000 per person + £175,000 residence nil-rate band = £500,000 each (£1m couple)
- •IHT rate: 40% above the threshold (36% if 10%+ to charity)
- •Transferring property to a trust triggers SDLT if any consideration or mortgage exists
- •Trust entry charge: 20% IHT on any value above the nil-rate band placed in discretionary trust
- •Lifetime gifts: no SDLT, but 7-year rule applies for IHT — taper relief reduces rate after 3 years
- •Tenants in common allows each owner to pass their share separately — greater IHT flexibility
In this article
IHT Thresholds and Rates (2025-26)
Inheritance tax applies to estates above the nil-rate threshold at 40%. The threshold has two components: the standard nil-rate band (£325,000) and the residence nil-rate band (£175,000) available when leaving a main home to direct descendants.
Nil-Rate Band (NRB)
£325,000
Per person. Transfers to spouse on death.
Residence Nil-Rate Band (RNRB)
£175,000
Only when leaving main home to direct descendants.
Combined threshold (individual)
£500,000
NRB + RNRB when leaving home to children/grandchildren.
Combined threshold (couple)
£1,000,000
Full unused allowance transfers on first death.
IHT rate above threshold
40%
Reduced to 36% if 10%+ of estate left to charity.
Annual gift exemption
£3,000
Per person per tax year. Carries forward 1 year.
The nil-rate band is frozen at £325,000 until April 2028. With UK house prices averaging £285,000 in early 2025, many estates now breach the threshold — particularly in London and the South East where average values significantly exceed £500,000.
How SDLT and IHT Interact
SDLT and IHT are separate taxes that apply at different points in a property's life. SDLT applies at acquisition; IHT applies at death (or on lifetime gifts that fall within the 7-year window). They interact in two main ways:
SDLT as an estate liability
SDLT already paid on a property reduces the net value of an estate indirectly — it was a cost of acquisition that reduced the overall wealth transferred into the estate. However, it does not directly reduce the IHT calculation on the property itself. The IHT base is the market value of the property at death, not net of original acquisition costs.
Structure choices affect both taxes
Choosing how to hold property — personally, jointly, via a trust, or through a company — affects the SDLT payable on acquisition and the IHT exposure on death. Joint tenancy means the property passes automatically to the surviving owner (outside the estate). Tenants in common means each share passes via the will, potentially using the nil-rate band of both owners separately.
Worked example: couple owning a property
A couple owns a £800,000 main home plus a £300,000 BTL, total estate £1.1m. As joint tenants on the main home, on the first death the full £800,000 passes to the survivor — no IHT, but the survivor now has a £1.1m estate on second death. Reorganised as tenants in common (50/50 on main home) and leaving their 50% to children with appropriate wills, each partner's estate is £700,000 (50% of £800k + 50% of £300k). With NRB + RNRB of £500,000 each, the taxable estate is reduced significantly.
Trust Purchases: SDLT and IHT
Trusts are sometimes promoted as an IHT mitigation tool for property. The reality is complex — both SDLT and IHT create charges at different stages.
SDLT when transferring into a trust
No SDLT is charged on a gift of property to a trust if there is no consideration and no outstanding mortgage. If the property has a mortgage and the trust assumes it, SDLT applies on the mortgage value assumed. For a £250,000 property with an £80,000 mortgage transferred to a trust: SDLT applies on £80,000 at standard rates (not the full property value).
IHT trust entry charge (chargeable lifetime transfer)
Placing property in a discretionary trust is a chargeable lifetime transfer for IHT. If the value transferred exceeds the nil-rate band (£325,000), a 20% entry charge applies to the excess. On a £500,000 property into trust: £175,000 over the NRB × 20% = £35,000 entry charge.
10-year anniversary charge
Every 10 years, a discretionary trust pays an anniversary charge of up to 6% on the value above the nil-rate band. On a trust holding property worth £500,000, this could be up to £10,500 per decade. This ongoing cost must be weighed against the potential IHT saving at death.
Lifetime Gifts: No SDLT, But the 7-Year Rule Applies
Gifting a property outright (with no mortgage) to a family member is a Potentially Exempt Transfer (PET) for IHT. No SDLT is payable by the recipient on a genuine gift (no consideration). The donor is treated as disposing of the property at market value for CGT purposes.
The IHT risk is the 7-year rule: if the donor dies within 7 years of the gift, the full value of the property is brought back into their estate for IHT assessment. Taper relief reduces the IHT rate after 3 years:
| Years Before Death | IHT Rate on Gift | Effective Taper Relief |
|---|---|---|
| 0–3 years | 40% | 0% |
| 3–4 years | 32% | 20% |
| 4–5 years | 24% | 40% |
| 5–6 years | 16% | 60% |
| 6–7 years | 8% | 80% |
| 7+ years | 0% | 100% (no IHT) |
Taper relief applies to the gift tax, not the nil-rate band. Only applies if the total value of gifts in the 7 years exceeds the NRB (£325,000).
Annual gift exemption
Each person can give £3,000/year free of IHT, regardless of the 7-year rule. This carries forward one year (maximum £6,000 in one year if previous year unused). On a property gift, only £3,000 of the value is exempt under the annual exemption — the remainder is a PET subject to the 7-year rule.
CGT on gifting
The donor is treated as selling the property at market value for CGT. If it is not their main residence, CGT applies on the gain (market value minus original cost). Annual exempt amount of £3,000 applies. This CGT cost must be factored into the overall planning — the IHT saving may be outweighed by the immediate CGT charge.
Joint Tenancy vs Tenants in Common
The way a property is held jointly has major implications for IHT and estate planning. There is no SDLT difference between the two — both structures pay the same SDLT on acquisition.
| Feature | Joint Tenancy | Tenants in Common |
|---|---|---|
| Passes on death | Automatically to survivor (right of survivorship) | Via will (or intestacy) |
| IHT treatment | Outside deceased's estate if passing to spouse | Included in estate — can use NRB of first to die |
| Ownership shares | Equal (cannot be unequal) | Any split (e.g., 50/50, 70/30, 90/10) |
| Can be sold | Only jointly | Each can sell their share independently |
| Best for | Couples maximising survivor protection | IHT planning, unmarried couples, business partners |
Many couples hold their main home as joint tenants and later convert to tenants in common for estate planning — a process called "severance of joint tenancy." This conversion does not trigger SDLT. A simple declaration or notice to the Land Registry is sufficient.
Company-Owned Property and IHT + ATED
Property held in a limited company does not benefit from Business Property Relief (BPR) for IHT purposes if the company's main activity is property investment. BPR applies to trading businesses — property investment is not a trade in this context. This means shares in a property investment company are subject to full IHT at 40% like any other asset.
However, shares in a company are easier to gift piecemeal than a property — you can transfer 20% of shares each year, using the annual exemption and taper relief more effectively. Each share transfer is a PET for IHT, with the same 7-year rule applying.
Estate Planning Strategies Involving Property
1. Ensure the nil-rate band is fully used
Make wills that ensure each partner's nil-rate band is used on first death rather than simply passing everything to the survivor. A discretionary nil-rate band will trust or a direct bequest to children for the NRB amount (with right to occupy for the survivor) achieves this.
2. Sever the joint tenancy
Convert joint tenancy to tenants in common to allow each partner's share to pass via their will, potentially using both sets of nil-rate bands. No SDLT is triggered by severance. Consider unequal shares if one partner has a lower estate for maximum efficiency.
3. Use the residence nil-rate band fully
The RNRB (£175,000 per person) is only available when leaving the main residence to direct descendants (children, grandchildren). If you downsize after age 55, the RNRB can still be claimed on the sale proceeds under the downsizing addition rules, provided proceeds are left to direct descendants.
4. Equity release to reduce estate value
Releasing equity from a property (via lifetime mortgage or home reversion) reduces the value of the estate and can fund gifts. The released equity gifted to children starts the 7-year IHT clock. No SDLT on equity release or lifetime mortgages.
5. Consider insurance in trust
A whole-of-life policy written in trust pays out IHT on death without adding to the estate. For a couple with a £1.5m estate and £200,000 IHT liability, a joint-life second-death policy in trust can fund the IHT without requiring the property to be sold. No SDLT or IHT implications for a trust receiving a life assurance payout.
Frequently Asked Questions
Does stamp duty affect inheritance tax?
SDLT and IHT are separate taxes — SDLT paid on acquisition does not directly reduce IHT on the estate. However, the structure in which property is held (personal, joint, trust, or company) affects both SDLT payable at acquisition and IHT exposure at death. Effective estate planning considers both taxes together rather than optimising one at the expense of the other.
Can I put my property in a trust to avoid inheritance tax?
Placing property in a discretionary trust can remove it from your estate for IHT purposes, but not immediately and not cheaply. The trust entry charge is 20% IHT on any value above your nil-rate band (£325,000). A 10-year anniversary charge of up to 6% applies every decade. And you must survive 7 years from the transfer for full IHT exemption. For most situations, a combination of will planning, severance of joint tenancy, and using nil-rate bands fully is more cost-effective than a trust.
Is there inheritance tax on a BTL property left to children?
Yes. Investment properties (BTL, holiday homes, commercial) do not qualify for the Residence Nil-Rate Band (RNRB) — that only applies to a main home left to direct descendants. A BTL property is included in your estate at market value and taxed at 40% above the standard nil-rate band of £325,000. On a £400,000 BTL property in an estate already using the NRB elsewhere, IHT would be £60,000 (40% × £150,000 taxable). Spreading ownership via tenants in common between partners can help use both NRBs.
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Emma Richardson, MRICS
Chartered Surveyor & Property Tax Specialist
Emma Richardson is a RICS-qualified Chartered Surveyor with over 12 years of experience in UK property taxation. She founded Stamp Duty Calculator to help buyers understand the complex world of property transaction taxes.