How to protect your property portfolio from IHT

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

Inheritance tax (IHT) and capital gains tax (CGT) are the most financially impactful considerations.

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

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.

The standard IHT threshold is £325,000 per individual, known as the nil-rate band, which is frozen at this level until 2030. 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 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 family home 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.

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. 

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 Relief (BR) 

If you have invested in commercial properties, it's worth exploring the possibility of utilising business relief (BR).

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

By investing in commercial properties that qualify for BR, 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, 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.

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).

There are a number of allowances and government relief schemes, for example, business asset disposal relief, which a financial adviser or accountant can assist with. 

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.

Get expert financial advice

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.