How to protect your property portfolio from IHT in the UK

If you have built up a property portfolio, it’s only natural to plan for what will happen to it when you’re gone.

Inheritance tax is likely to be your biggest concern, but you may have to think about capital gains tax too.

In this article, we will explore some strategies to help you protect your property portfolio.

See also: What to do if you inherit property

What are the IHT thresholds and exemptions for property owners? 

Before taking any steps to protect your property portfolio from IHT, it's crucial to have a clear understanding of the current IHT thresholds and exemptions.

The standard IHT threshold is £325,000 per individual, known as the nil-rate band, which is frozen at this level until 2031. Anything above this threshold is subject to a 40% tax rate.

Say your property portfolio is valued at £1 million. You will pay 0% up to £325,000 and then 40% on the remaining £675,000, making your tax burden £270,000.  

However, there may be various exemptions and reliefs available, such as the residence nil-rate band (RNRB), which provides an additional allowance (worth £175,000) for individuals who pass on their family home to direct descendants, like children or grandchildren.

Transfers between married couples and civil partners on death are also tax-free and the surviving partner will benefit from a transfer of any remaining tax-free allowance.

This means married couples can pass on £650,000 tax-free between them when they die, rising to £1 million if they leave a family home to children or grandchildren. 

How lifetime gifts can reduce your IHT liability 

One effective way to protect your property portfolio from IHT is by making lifetime gifts.

By gifting properties or shares in properties to your loved ones during your lifetime, you may be able to reduce the value of your estate and potentially minimise the IHT liability.  

But it’s important to take great care with these gifts. If you still benefit in any way from the property, it may be regarded as a ‘gift with reservation of benefit’ and would still be included in your estate when you die. To avoid breaking these rules, you would need to pay a full market rent for its use.

It’s also important to be aware that lifetime gifts will be subject to the seven-year rule. This means you will need to live for seven years after making the gift for it to become free of IHT.

You might also have to pay CGT when you gift the property. Therefore, it's essential to seek professional advice and carefully plan any lifetime gifts to maximise their effectiveness.  

How trusts can protect your property portfolio from IHT 

Trusts can be helpful as part of your IHT planning, allowing you to pass on wealth, but still retain some control.

This is particularly useful where you want to pass on a gift, but the intended beneficiaries aren’t ready yet - for example, if they are too young or financially vulnerable.

By transferring properties into a trust, you effectively remove them from your estate, which can reduce the potential IHT liability.

However, the trust needs to be set up carefully. If you can still benefit from using properties held inside the trust, this will count as a “reservation of benefit,” and the gift won’t be counted for IHT purposes.

In addition, there may be an IHT charge when you gift property into a trust if the value of the property exceeds your nil-rate band.

For example, if you transfer property worth £400,000 into a trust and have an available nil-rate band of £325,000, £75,000 will be charged IHT at a rate of 20%. The remaining 20% IHT may be payable if you die within seven years.

There are various types of trusts available, including discretionary trusts and interest in possession trusts. These trusts also incur additional ongoing tax charges, so it’s important to get advice.

Each type of trust has its own advantages and considerations, so it's advisable to consult with a specialist to determine the most suitable trust structure for your needs. 

Learn more: How to set up a trust in the UK

Can Business Relief (BR) reduce IHT on your property portfolio? 

Many landlords search for ways to avoid inheritance tax on rental property through business relief (BR).

If you’re a business owner, then you may qualify for business relief on commercial properties that are part of a trading business.

However, most properties don’t qualify for BR, as they are classed as investment properties.

You should take specialist advice on how your business is structured to maximise potential business property relief.

Using life insurance to cover an IHT bill

Another strategy to protect your property portfolio from IHT is to take out a life insurance policy.

By setting up a life insurance policy that pays out a lump sum upon your death, your loved ones can use this sum to cover the IHT liability on your estate, ensuring that your property portfolio can be passed on intact.

This can be particularly beneficial if you wish to keep your properties within your estate for a longer period or if you have a large IHT liability that cannot be easily managed through other means. 

If you’re using life insurance to pay an IHT bill, it’s important the policy is written in trust. This ensures the pay out is paid to your beneficiaries and doesn’t form part of your estate, where it would be subject to IHT.

Capital Gains Tax (CGT) 

For a detailed explanation of CGT in relation to buy-to-let property, read our guide here. 

In general, beneficiaries will not need to pay CGT when they inherit residential property. However, if and when they come to sell the property, they may become liable for CGT on any gains, if it has risen in value.

Everyone has an annual CGT allowance, which currently stands at £3,000 a year (or £1,500 for trusts).

How much CGT you pay will depend on your income tax rate. CGT is 24% if you pay the higher or additional income tax rate or 18% if you pay the basic rate (and remain in that tax bracket once your taxable gain has been factored in).

Private residence relief (PRR) means homeowners will not have to pay CGT on a residential property that is their main residence. For landlords or those with large property portfolios, PRR will not apply to most of your portfolio, and CGT will apply to any capital growth.

Landlords should ensure that CGT on property is included in their annual tax return to avoid paying expensive penalties to HMRC.

The rules on furnished holiday lets changed in April 2025, so they are no longer classed as business assets for CGT. This means they can no longer benefit from business rollover relief, business asset disposal relief and gift hold-over relief.

Get expert advice on property and inheritance tax planning

Protecting your property portfolio from IHT requires careful planning and consideration.

Understanding the IHT thresholds and exemptions, exploring lifetime gifts and utilising trusts can help mitigate the impact of IHT on your property portfolio.  

Unbiased can match you with a qualified financial adviser for your property and inheritance tax needs.