I live with my twin brother. We both are single and have never married, and own 50 per cent of the house each, with the mortgage having been paid off.
We turned 57 years old in October 2024, and we are both worried about inheritance tax when one of us passes. The house is worth around £1.3million.
Is there anything we can do to avoid inheritance tax? We want to avoid a situation where the surviving twin might have to sell the house to pay the tax bill.
I understand that couples would be able to pass on the property tax-free, which seems unfair. J.C
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Harvey Dorset of This is Money, replies: As a fellow twin, I understand what it is like to have that strong connection with a sibling.
When you bought your house more than a decade ago, choosing to pool your resources to buy a house together likely seemed a smart move.
Unfortunately, doing so has also opened you to future tax liability that could force one of you to sell your cherished home.
When the first one of you dies, you would like to pass on your share of the home to the other twin.
It would be reasonable to expect this might be something you can do without incurring a tax bill.
And yet, despite this, siblings who cohabit aren’t extended the same rights to transfer assets as married couples or those in civil partnerships are.
Unfortunately, you are far from alone in this situation. The same also applies to those who are in a cohabiting couple but aren’t married or in a civil partnership.
However, there are things that you can do in order to reduce the eventual inheritance tax bill that one of you will face further down the line.
To find out what you can do in order to cut the amount you will be liable for when one of you dies, This is Money spoke to two financial advisors.
How does inheritance tax work?
Tom Miller, financial planner at Charles Stanley, replies: Inheritance tax can be a significant concern, especially when dealing with valuable assets like your home. In the UK, IHT is levied on the estate (property, money, and possessions) of a deceased person.
The standard IHT rate is 40 per cent. This is applied only to the portion of the estate exceeding the threshold, known as the nil-rate band.
The nil-rate band is a threshold below which no inheritance tax is charged on an estate. In the UK, this threshold is currently set at £325,000.
This means that the first £325,000 of an individual’s estate is taxed at a rate of 0 per cent.
Any value above this threshold is subject to the standard IHT rate of 40 per cent.
The disparity in treatment for single individuals versus those who are married or in civil partnerships highlights issues within the current IHT framework.
Married couples and civil partners can transfer assets to each other without incurring any tax liability, typically resulting in no tax due after the first death.
However, this benefit does not extend to cohabiting siblings. Single individuals are subject to a tax-free allowance (the nil-rate band) capped at £325,000.
How much IHT would they pay?
Consider the value of your house. If each share of the house is worth £650,000 (£1.3million in total), the IHT calculation would be as follows:
1. Estate value: £650,000 (value of the share of your house)
2. Nil-rate band: £325,000
3. Taxable estate: £650,000 – £325,000 = £325,000
4. IHT at 40 per cent: £325,000 x 40 per cent = £130,000
Thus, the IHT liability on each estate would be £130,000.
This amount could increase if there are additional assets within the estate, making further planning essential to potentially reduce this liability.
How could the brothers reduce IHT?
First, it is crucial for both parties to have a will. A will provides clear instructions on who should inherit your share of the property, presumably each other in this case.
Without a will, an estate is subject to the rules of intestacy, which may not align with your personal wishes.
One option to mitigate this liability is to set up a whole of life insurance policy to cover the potential IHT bill.
Upon death, this policy could provide the surviving sibling with the necessary funds to pay the tax liability, ensuring they do not need to sell the property and can continue living in it.
This can be costly, however, and does depend on underlying health issues.
Proposals to extend IHT exemptions to include cohabiting siblings are currently being considered by the House of Lords.
This change could provide significant relief for individuals in similar situations.
How to get their affairs in order
Lee Wells, managing partner and financial adviser at Ablestoke, replies: Inheritance tax is on many people’s mind since the Budget, and I think it’s likely the landscape will continue to change under our new Government.
Inheritance tax is something which can only be mitigated or reduced if the reliefs apply and, in your position, there may not be many that do.
However, it is important you arrange your affairs properly.
First, structure the ownership of your property correctly and ensure that you own the property in something which is called ‘tenants in common’ where you each own your own 50 per cent of the property, rather than ‘joint tenants’ where you each own 100 per cent.
It sounds from what you have said that this is already the case.
This will mean that in the event of one of your deaths you will only be applying for probate (control) of your brother’s half of the estate.
This is also important for long-term care planning in the event of one of you requiring care in later life.
Ownership can be checked at the Land Registry.
You then need to ensure you both have an up to date will which passes your halves to each other on your death, and I would also recommend you arrange to have power of attorney for each other’s affairs both health and financial.
This means that in the event of you losing mental capacity, the other can then act on your behalf.
Once this has been done then your half would pass to each other.
Assuming you each have no other assets, if one of you were had passed away yesterday, then net of any costs, 50 per cent of £1.3 million property value would pass across, at £650,000.
You each have a £325,000 inheritance tax allowance (IHT) called the nil rate band (NRB) this means you will not pay tax on the first £325,000, leaving £325,000 as a taxable estate. This will be taxed at 40 per cent, so if the home was the only taxable asset you would have an IHT bill of £130,000.
Unfortunately, the residential nil rate band will not apply as this only benefits direct descendants who receive the property, and siblings do not qualify.
One strategy to reduce your loss is to fund a whole of life insurance policy, written into trust for each other, to pay the tax bill when it becomes due.
This is often necessary as on death, the inheritance tax bill will become due before probate (control of the deceased’s estate) is granted.
Writing the money from the insurance policy into trust with the survivor as the beneficiary means that it bypasses the estate, and will provide the means to settle the tax bill, allowing the estate to be released.
It is imperative the policy is written into trust, as if it is not, it would pay into the estate – increasing the value and therefore the inheritance tax due.
Whilst the cost of premiums will be relatively high, it will invariably still be less than the tax bill.
