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How to protect your property portfolio from IHT

5 mins read
by Unbiased Team
Last updated Thursday, April 11, 2024

Having built up a large property portfolio, it’s only natural to plan for what will happen to this once you are gone.

Inheritance tax and capital gains tax are the most financially impactful considerations.

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

See also: What to do if you inherit property

Understand the IHT thresholds and exemptions 

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.

As of the time of writing, the standard IHT threshold is £325,000 per individual, known as the nil-rate band.  

Anything above this threshold is subject to a 40 per cent tax rate. For example, say your property portfolio is valued at £1,000,000.

You will pay 0 per cent up to £325,000 and then 40 per cent on the remaining £675,000 making your tax burden £270,000.  

However, there are various exemptions and reliefs available, such as the residence nil-rate band (RNRB), which provides an additional threshold for individuals who pass on their main residence to direct descendants.  

Married couples and those in a civil partnership do not pay IHT when their partner dies.

In fact, the surviving partner will benefit from a transfer of any remaining tax-free allowance.

If there are no other beneficiaries, then this means the surviving partner will have a threshold of £650,000 when the time comes for them to pass on the combined estate. 

Consider lifetime gifts 

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 can reduce the value of your estate and potentially minimise the IHT liability.  

However, it's important to remember that there are specific rules surrounding lifetime gifts, including the seven-year rule.

If you pass away within seven years of making a gift, the value of the gift may still be subject to IHT.

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

Use trusts 

Trusts can be a powerful tool for protecting your property portfolio from IHT.

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

There are various types of trusts available, including discretionary trusts and interest in possession trusts.

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

Explore Business Property Relief (BPR) 

If you have invested in commercial properties, it's worth exploring the possibility of utilising Business Property Relief (BPR).

BPR provides relief from IHT on certain business assets, including qualifying property businesses.

By investing in commercial properties that qualify for BPR, you may be able to reduce or eliminate the IHT liability on those assets.

However, it's important to note that not all commercial properties will qualify for BPR, so it's crucial to seek professional advice and carefully evaluate the eligibility criteria. 

Consider life insurance

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. 

Capital Gains Tax (CGT) 

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

In general, you will not need to pay CGT on inherited residential property as a beneficiary.

Selling up is one option for your property portfolio and will allow you to liquify your assets and take advantage of capital growth and/or favourable market conditions.

However, should you sell property, that has benefited from capital growth, before your death or some time after you have inherited it, then CGT would apply.  

There is a higher rate of CGT on qualifying property than other chargeable assets.

How much CGT you pay will depend on your income tax rate.

For those on the higher rate, CGT is 28 per cent on property and 20 per cent on other chargeable assets.

If your taxable income is at the basic rate, then you will pay 18 per cent on gains to property and 10 per cent on other assets. 

There are a number of allowances and government relief schemes, for example Business Asset Disposal Relief, that your financial adviser or accountant is well placed to assist with. 

Private Residence Relief (PRR) means homeowners will not have to pay CGT on a residential property that is your main residence.

For landlords or those with large property portfolios, PRR will not apply to the majority of your portfolio and CGT will apply on any capital growth.

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

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

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

Unbiased can help match you with the right expert for your property and inheritance tax needs.

Find the perfect financial adviser or accountant now. 

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Unbiased Team
Our team of writers, who have decades of experience writing about personal finance, including investing, retirement and pensions, are here to help you find out what you must know about life’s biggest financial decisions.