How to prevent 40 per cent of your property portfolio being lost to Inheritance Tax

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 portfolio if you wish to pass it down to the next generation.

An estate over Nil Rate Band (NRB) of £325,000 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 and this is available if you owned a main residence and is passing to your descendants. This is currently set at £175,000 until 5 April 2028. However, if the value of the total estate at date of death is over £2m than for every £2 above this level the RNRB is reduced by a £1.

This means that if your estate value is below £2m, then half a million pounds of your estate will be free of tax.

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 legally avoiding taxes.

Passing your entire estate to your spouse on death means that you will double their NRB and RNRB allowance. When both die, the value of the estate that can be passed inheritance tax free is £1 million if the values of both the estates are below £2m at the date of death.

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

For example, if you used 40 per cent of your NRB to give your children a gift of £130,000, your spouse would be entitled to 60 per cent of your NRB 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) because gifting the property is regarded as a disposal for capital gains. In addition, if there is a loan than with the gifted property there will be a stamp duty charge to pay.

Whilst no one can predict the date of their own death, they can reduce the inheritance tax bill and be able to take full advantage of RNRB if the right actions are taken.

Getting early advice from one of our tax and probate specialists can help prevent a significant IHT bill in future. To find out more, please contact us.

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