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40 per cent of your property portfolio could be lost to Inheritance Tax – here’s how to prevent it

Successful property investors might find themselves in a situation where the value of their properties is increasing, their mortgages are being paid off and their personal wealth is consistently growing.

This might all sound like a perfect position to be in, but it hides significant consequences for your property portfolio when you wish to pass it down to the next generation.

A capital wealth over the £325,000 IHT threshold is subject to a 40 per cent Inheritance Tax (IHT) upon death. This means that the beneficiaries of those who have property portfolios over this threshold face the prospect of losing almost half of the property and personal wealth that was intended to be passed down.

Assuming you want to pass down as much of your wealth as possible, it might be time to start looking into alternative solutions for the future of your property portfolio.

Which taxes do you have to pay?

An estate valued over £325,000 is liable for IHT. However, there are some further reliefs that can help property owners.

For example, the Residence Nil-Rate Band (RNRB) takes some of the value out of the property in an estate. This is currently set at £175,000.

This means that, in practice, your estate will not be charged IHT until it reaches half a million pounds in value.

Passing your portfolio to your spouse

Your spouse will not pay IHT upon receiving your estate. So, passing your property portfolio to them could be a way of avoiding taxes.

Passing your entire estate to your spouse means that you will double their IHT threshold and RNRB allowance. When they die, therefore, they will be able to pass down up to £1 million before IHT comes into effect.

If you decide to split your estate, your spouse will receive the percentage of the allowance that you didn’t use to distribute your estate.

For example, you used 40 per cent of your IHT allowance to give your children a gift of £130,000, your spouse would be entitled to 60 per cent of your allowance on top of their own. They would therefore be entitled to pass down £520,000 (100 per cent = £325,000 + 60 per cent = £520,000) IHT free.

Gifting your portfolio

Giving your property portfolio away as a gift means that, whilst you may avoid IHT in some cases where the gift is made seven or more years prior to death, you will usually have to pay Capital Gains Tax (CGT).

This is HMRC’s way of preventing sudden gifting of property, just before the death of the owner, as a way of avoiding tax.

Whilst no one can predict the date of their own death, if you wish to transfer the ownership of one or more of your properties it is best to do this as early as possible.

Getting early advice from a solicitor can help prevent huge financial losses in the form of IHT. It is essential that you engage a qualified solicitor to advise you on estate planning and your final wishes.

At Mander Hadley our solicitors are experts at answering Inheritance Tax and estate related queries. Get in touch today or click here to view our full list of services.

Linsey Graham

Senior Probate Executive – Wills, Probate & Older Client Services

I have worked for Mander Hadley for 17 years and specialise in Wills, trusts, tax, probate and the administration of estates.