How Can Landlords Minimise Their Inheritance Tax Liability?
Inheritance tax is a 40% tax applied after a person dies to estates that are worth over £325,000 – or more if a home or the sale proceeds of a home are included. Anything that can be done to minimise this liability should be investigated but be mindful that a lot of these need to be planned well in advance...
We spotted a great article written by Alex Davies - CEO and Founder of 'Wealth Club' on how to minimise Inheritance Tax for landlords and we thought it was worth including in our blog:
Figures from HMRC show that the Treasury raked in another £4.1 billion in inheritance tax receipts in the months between April and October 2022.
This is £500m more than in the same period a year earlier, continuing the upward trend. These figures are revealed just days after the Autumn Statement in which it was announced that the inheritance tax threshold of £325,000 will be frozen until April 2028.
These new figures demonstrate just how much the government’s inheritance tax take seems to be increasing without the need for any more freezes, thanks largely to the steady increases in house prices which are pushing more regular hardworking families above the threshold who are relying on money being passed down through the generations.
While the average bill is currently £216,000, research conducted by Wealth Club shows just that with this extended freeze combined with rampant inflation, average inheritance tax bills are conservatively estimated to reach £297,793 by 2025-26 and £336,605 by 2027-28.
There has been a total U-turn on inheritance tax over the last few months. From Liz Truss raising the hopes of the nation with a cut back in September, and now Jeremy Hunt announcing the extension of the freeze until 2028. This is another stealth tax and the case of the boiling frog is apt. The treasury hopes by leaving rates and allowances unchanged, inflation can do the hard work of turning the temperature up on tax payers without them noticing.
Contrary to what many think, inheritance tax doesn’t just affect the super-rich. It will be the thousands of hardworking families that will bear the brunt. Rampant inflation, soaring house prices and years of frozen allowances will magnify the tax take in the years ahead. More and more families are going to find themselves hit by death duties they might not expected or planned for.
How inheritance tax is calculated
Inheritance tax (IHT) of 40% is usually chargeable if one’s assets exceed a certain threshold, after deducting any liabilities, exemptions and reliefs.
The threshold (nil rate band) has been £325,000 per single person since 6 April 2009 – and will stay frozen at this level up to and including 2028-29.
There is an additional transferrable main residence nil rate band of £175,000 available when passing the family home down to children or other direct descendants.
Any unused threshold may be transferred to a surviving spouse or civil partner. So, a couple could currently potentially pass on up to £1m before IHT might apply.
The good news is that with some careful planning there are lots of perfectly legitimate ways you can eliminate or keep IHT bills to the minimum, so more of your wealth is passed on to your loved ones rather than being syphoned off by the taxman.
1. Make a Will
Making a will is the first step you should take. Without it, your estate will be shared according to a set of pre-determined rules. That means the taxman might end up with more than its fair share.
2. Use your Gift Allowances
Every year you can give up to £3,000 away tax free. This is known as the annual exemption. If you didn’t use it last year, you can combine it and pass on £6,000. You can also give up to £250 each year to however many people you wish (but only one gift per recipient per year) or make a wedding gift of up to £5,000 to your child; up to £2,500 to your grandchild; up to £2,500 to your spouse or civil partner to be and £1,000 to anyone else. Beyond these allowances, you can pass on as much as you like IHT free. So long as you live for at least seven years after giving money away, there will be no IHT to pay.
3. Make Regular Gifts
You can make regular gifts from your income. These gifts are immediately IHT free (no need to wait for seven years) and there’s no cap on how much you can give away, provided you can demonstrate your standard of living is not affected.
4. Leave a legacy – Give to Charity
If you leave at least 10% of your net estate to a charity or a few other organisations, you may be able to get a discount on the IHT rate – 36% instead of 40% – on the rest of your estate.
5. Use your Pension Allowance
Pensions are not usually subject to IHT for those under 75 years old – they can be passed on tax efficiently and, in some cases, even tax free. If you have any pension allowance left, make use of it.
6. Set up a Trust
Trusts have traditionally been a staple of IHT planning. They can mean money falls outside an estate if you live for at least seven years after establishing the trust. The related taxes and laws are complicated – you should seek specialist advice if you’re considering this.
7. Invest in Companies Qualifying for Business Property Relief (BPR)
If you own or invest in a business that qualifies for Business Property Relief – the majority of private companies and some AIM-quoted companies do – you can benefit from full IHT relief. You must be a shareholder for at least two years and still be on death though.
8. Invest in an AIM IHT ISA
ISAs are tax free during your lifetime but when you die, or when your spouse dies if later, they could be subject to 40 per cent IHT. An increasingly popular way of mitigating IHT on an ISA is to invest in certain AIM quoted companies which qualify for BPR. You must hold the shares for at least two years and if you still hold them on death you could potentially pass them on without a penny due in inheritance tax.
9. Back Smaller British businesses
The Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) offer a generous set of tax reliefs. For instance, SEIS offers up to 50 per cent income tax and capital gains tax reliefs, plus loss relief if the investment doesn’t work out. But EIS and SEIS investments also qualify for BPR, so could be passed on free of IHT.
10. Invest in Commercial Forestry
This is an underused option for experienced investors. Pension funds and institutions have long ploughed money into forestry. The Church Commissioners has a forestry portfolio worth £400 million. Commercial forest investments should be free of IHT if held for at least two years and on death. You should also benefit from capital appreciation in the value of the trees (and the land they are on) and from any income produced by harvesting the trees and selling the timber (this income may also be tax free).
11. Spend It!
One sure-fire way to keep your wealth away from the taxman’s hands is to spend it.
We love number 11!