Inheritance Tax for the Property Investor

Inheritance Tax for the Property Investor - Property Investing 101 logo

Inheritance tax for the property investor is the tax that tends to be overlooked.

There are a number of reasons for this: it’s not transactional like Stamp Duty Land Tax or annual like income/corporation tax; it’s associated with wealthy landowners and ‘rich people’ and most significantly it’s liked with death, which most people don’t want to think about.

Inheritance Tax for the property investor, however, can be a very real problem, particularly in times of appreciating asset values.

For example, the cash return on a portfolio of 10 single buy-to-lets could be fairly modest, but the capital value of those assets could be well in excess of £1m.

Like most taxes, Inheritance Tax (IHT for short) is fairly simple on the one hand but has lots of complexities on the other.

At its simplest, IHT:

  • Is paid on the death of a taxpayer
  • With an estate valued in excess of £325,000
  • At 40% on the value above £325,000 
  • If your spouse or civil partner is your sole inheritor, then no IHT is payable at the time of death
  • There is a further £175,000 of ‘nil rate band’ available on your residential property if transferred on death
  • Any of your own unused nil rate band can be inherited by your spouse or civil partner
  • Any liabilities (such as mortgages) are deducted from the value of your assets to work out the total of your estate

There are times when IHT is triggered other than on death. These include giving away assets or large sums of money, or putting them into trust, and are called Lifetime Transfers. This is because IHT works on the basis of the ‘diminution in value’ of your estate.

In other words, if you move assets out of your estate and into someone else’s, including a trust or a limited company, then you have reduced your personal assets and increased another’s. This is what HMRC want to tax you on.

How to reduce Inheritance Tax for the Property Investor

The two most common strategies for reducing your exposure to IHT are:

  1. Take out a life insurance policy to cover the estimated tax bill – make sure you put the policy into trust when you set it up otherwise your estate will be taxed on the proceeds
  2. Start to reduce the value of your assets by giving them away to the next generation in your lifetime, instead of on death

Both these strategies need careful consideration. For example, most Lifetime Transfers don’t attract IHT if you survive for the next seven years (the Seven Year Rule), but certain transfers to trusts are charged at 20% with more being payable on death.

Finally, certain assets don’t form part of your estate for IHT purposes. For example, business assets or shares in a trading company are often in this category.

Unfortunately for the majority of property investors, having a property portfolio doesn’t count as a business asset for IHT. This is because HMRC view it as an investment and not a trade, and therefore it doesn’t attract business property relief.

However, there are circumstances in which a property portfolio can be classed as a business, if structured in the right way.

This can be a complicated process, but it is well worth exploring for any investor with a significant IHT exposure. 

As always, the key to any tax saving strategy is to take professional advice at an early stage so that expensive mistakes can be avoided.

Do get in touch if you are a property investor looking to reduce your exposure to IHT.

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