As a property owner, it is natural that you’ll to want to pass your assets on to your loved ones when you die. It’s even more natural to want to make sure those loved ones can inherit as much of your estate as possible, without losing too much of it to Inheritance Tax (IHT).

Whether you are looking at how to avoid inheritance tax on property that’s your main residence, or you are a buy to let landlord seeking out tax mitigating strategies for your property portfolio, this article is for you.

Join us as we share seven ways to reduce your IHT liability, so that your beneficiaries can enjoy more of your estate when the time comes.

What is Inheritance Tax?

Inheritance Tax (IHT) is a UK tax levied on property and money acquired by inheritance or gift. It is paid based on the value of the net estate at death, calculated as the value of assets minus debts, and after applying any available tax reliefs.

IHT is charged at 40% of whatever is above the current threshold, which is currently set at £325,000. This threshold is often referred to as the ‘nil-rate band’.

There are, however, a number of reliefs available which reduce IHT liabilities. The most common are:

• The transfer of assets between spouses and civil partners, during life or at death, is completely exempt from IHT. What’s more, the surviving partner benefits from a transfer of any remaining tax-free allowance, which means that if there are no other beneficiaries, they will have a threshold of £650,000 when the time comes for them to pass on the combined estate.

• If the main residence is passed to a spouse or civil partner, then that property is not included in the value of the net estate. If it is passed to direct descendants, the nil-rate band is increased to £500,000. This is known as the ‘residence nil-rate band’.

• Owners or part owners of a business or agricultural property may be eligible for 50% or 100% relief from IHT on those assets.

According to recent data from HMRC, the average IHT bill in the UK is £214,000. And according to polls, this tax is the most unpopular in the UK.

So, let’s take a look at how to avoid Inheritance Tax on property, or at least, reduce it.

How to avoid Inheritance Tax on property?

The information we’ve compiled for this article should provide you with a good overview of how to avoid Inheritance Tax on property. However, it is important to bear in mind that every situation is different, and that the best tax mitigation strategies are the ones that are tailored to the individual.

We therefore recommend that once you have studied this guide, you seek independent tax planning advice from a qualified professional to make sure you are armed with the right guidance.

1. Make a will

Without a will, assets, including property, will be distributed in line with intestacy rules. This could make them liable to IHT that could otherwise be avoided.

If you don’t have a will in place, you can check how your estate will be divided when you die using this inheritance checker.

Making a will allows you to choose how your assets will be distributed when you die. This allows you to plan for and reduce your Inheritance Tax liability.

2. Stay below the IHT threshold

As we’ve mentioned, the IHT nil-rate band is £325,000 and will remain as such until at least April 2028.

As we’ve also discovered, if the main residence is passed to a spouse or civil partner, then that property is not included in the value of the net estate. And that if it is passed to direct descendants (the deceased’s children or grandchildren and/or their spouses), the nil-rate band is increased to £500,000. This is known as the ‘residence nil-rate band’.

Therefore, if you are able to maintain your assets at below the relevant thresholds, then your beneficiaries will have zero IHT liability.

Naturally, with a multi-property portfolio this may prove to be a challenge. But if you can downsize your main residence, and consider making lifetime gifts with any surplus funds, then you may be able to avoid or at least reduce your beneficiaries’ Inheritance Tax liability.

3. Make lifetime gifts

By gifting property or property shares during your lifetime, you can reduce the value of your estate and potentially mitigate the IHT liability.

However, it is vital to be aware that there are specific rules around lifetime gifts, in particular, the seven year rule.

This rule dictates that if you die within seven years of making the gift, its value may still be counted for IHT purposes.

There may also be a Capital Gains Tax (CGT) liability if you gift property. However, if you have assets that have dropped in value since they were purchased, then they could be passed on without attracting CGT.

These are complex strategies, and it is therefore essential to seek professional advice so that you can plan any lifetime gifts into your overall tax planning strategy.

4. Make use of trusts

Trusts can be an effective way to protect your property from IHT.

By putting a house in trust, you effectively remove them from your estate for IHT purposes.

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

There is the option to put assets into trust for the benefit of children when they reach the age of 18 or 21, for example. Or, with an interest in possession trust, you can sign the asset over, but still take an income from it whilst avoiding IHT on death. The income in this case would be subject to income tax where applicable, however.

Each type of trust has its own benefits and considerations. This again makes it imperative to take professional tax planning advice.

5. Take out a life insurance policy

Another potential strategy to avoid inheritance tax on property and buy to let portfolios is to take out a life insurance policy.

Policies that pay out a lump sum on death will provide beneficiaries with the funds to cover the IHT liability, ensuring that the property or portfolio can be passed on intact.

Life insurance is particularly useful if the tax needs to be paid before the estate can be distributed, or any properties need to be sold to foot the bill. It is also helpful if you prefer to keep the property within your estate for longer.

Bearing in mind that IHT is payable within six months of the person’s death, and that HMRC will start charging interest once the six months lapses, it is useful to have something in place to cover the liability.

A life insurance policy intended for this purpose must be set up to pay into a trust. If it isn’t, the payment itself will form part of the estate, and will therefore be subject to IHT.

6. Check if you can use Business Property Relief (BPR)

If you have commercial properties within your portfolio, it is worth looking into whether you can make use of Business Property Relief (BPR).

BPR provides IHT relief on certain business assets. This includes qualifying property businesses.

By investing in commercial properties that qualify for BPR, it may be possible to reduce or even avoid IHT altogether on those assets.

It is important, however, to be aware that not all commercial properties will be eligible for BPR. Again, taking professional advice is vital, especially if you are yet to make your investment and are relying on the relief to kick in after you’ve died.

7. Leave a legacy to charity

When looking at how to avoid Inheritance Tax on property or other assets, leaving a legacy to a charity is an option.

Anything you leave to charity will be free from IHT. What’s more, if you leave 10% or more of your assets in your will to charity, you can reduce the rate of IHT on everything else within your estate from 40% to 36%.

Looking to protect your property portfolio from tax and other financial uncertainties?

Protecting your property or buy to let portfolio from Inheritance Tax calls for careful planning, due consideration, and professional advice.

As well as exploring how to avoid Inheritance Tax on property, you may also be looking at ways to safeguard your investments, and maximise your profitability as a landlord.

With this in mind, you may find it beneficial to consider a guaranteed rent scheme.

Guaranteed rent schemes are valued by landlords not just because they pay the rent monthly without fail, even if the property is vacant or the tenants have defaulted on their payments. But also because they include a property management service, covering maintenance and repairs, everyday tenant liaison, regular property inspections and tenant sourcing and referencing.

This all-in service cuts costs for landlords, as well as providing peace of mind, and removing the typical headaches associated with renting a property out privately.

At City Borough Housing, we offer a guaranteed rent scheme with full transparency.

Our service includes a full professional property management service, plus the cost and co-ordination of maintenance and repairs and interim property inspections. We also promise to return the property at the end of the agreement in its pre-let condition, allowing for fair wear and tear.

To learn more about how our guaranteed rent scheme works, and to request your free, no-obligation property valuation, please get in touch.