Inheritance tax (IHT) is a tax that is paid on the value of an estate when the owner dies. Inheritance tax for landlords in the UK is a significant part of their business planning, as very often landlords decide to invest in property with the goal of passing on wealth to their children or grandchildren. In a recent study, Kings Court Trust found that a staggering 70% of property investors in the UK are motivated by the desire to generate intergenerational wealth (the study was conducted in 2022 and surveyed 1,000 property investors in the UK).
In this blog post, we will discuss the basics of IHT for landlords, including the current rates, allowances, and reliefs. We will also provide some tips on how to reduce your IHT liability (quick reminder: we do not provide financial advice, and we do recommend seeking advice from professionals to manage your investments).
What is Inheritance tax (IHT)?
Inheritance tax (IHT) is a tax that is paid on the value of an estate when the owner dies. The estate is the total value of all of the deceased’s assets, minus any debts or liabilities. The current IHT rate in the UK is 40%. However, there is a nil rate band of £325,000. This means that the first £325,000 of an estate is not subject to IHT.
Allowances and reliefs
There are a number of allowances and reliefs that can reduce your IHT liability. These include:
- The main residence nil rate band: This is an additional nil rate band of £175,000 that is available for the deceased’s main residence. This means that the first £500,000 of the value of the deceased’s main residence is not subject to IHT.
- Inheritance tax relief for gifts: You can reduce your IHT liability by making gifts during your lifetime. However, there are rules on how much you can give away without incurring an IHT charge.
- Inheritance tax relief for business property: If you own a business, you may be able to claim IHT relief on the value of the business. (There is a current trend of landlords who are increasingly choosing to acquire their properties through limited companies, your can find more details in our article).
Tips for managing your IHT liability
There are a number of things you can do to be efficient with your IHT liability, including:
- Make sure you have a valid will. This will ensure that your assets are distributed according to your wishes and that your IHT liability is minimized.
- Consider making gifts during your lifetime. This can reduce your IHT liability and can also help you to spread the value of your assets over time.
- Take advantage of allowances and reliefs (listed above 👆). There are a number of allowances and reliefs that can reduce your IHT liability. Make sure you understand these and use them to your advantage.
- Seek professional advice. If you are concerned about IHT, it is important to seek professional advice from a qualified financial advisor or solicitor.
Choosing the right ownership structure
There are a number of ownership structures that can help landlords with their IHT liability. These include:
Trusts are a more complex ownership structure, but they can offer a number of benefits in terms of IHT liability. Trusts can be used to hold property on behalf of another person, such as a child or grandchild. This can be beneficial if you want to ensure that your property is passed on to a specific person, but you do not want them to have access to it until they reach a certain age.
Trusts can also be used to reduce IHT liability by spreading the value of your assets over time. For example, you could set up a trust that allows you to make gifts to your children or grandchildren each year without incurring an IHT charge.
Limited companies are a good option for landlords who want to protect their personal assets from IHT. When you own a property in a limited company, the assets of the company are not considered to be your assets. This means that if you die, your heirs will not be liable for IHT on the value of the company’s assets.
However, it is important to note that there are a number of rules and regulations governing the use of limited companies to reduce IHT liability. For example, you must ensure that the company is genuinely trading and not simply a vehicle for holding property.
If you are considering using an ownership structure to reduce your IHT liability, it is important to seek professional advice from a qualified financial advisor or solicitor. They will be able to help you to understand the different options available to you and to choose the option that is right for you.
Inheritance tax for landlords – closing thoughts
Inheritance tax is a complex issue, but it is important for landlords to understand the basics. By familiarising yourself with the information in this blog post, you can get clarity on the available options to ensure that your assets are passed on to your loved ones in the most tax-efficient way possible.
Hammock helps you monitor your property investment in real-time
If you’re new to our blog, you might not know about our landlord accounting software, Hammock – created by landlords, for landlords. Hammock gives you instant access to the key metrics of your property investment: rental yields, loan-to-value ratio, and even property valuations, so you can monitor the potential for capital gains.
Our guide is for educational purposes only, as we don’t provide tax advice. We always recommend consulting experts (in this case your accountant or tax advisor) when dealing with rules and regulations.