Inheritance tax planning for landlords is fundamental, particularly as most property will form part of a deceased’s estate. In recent history, property values have not been increasing in proportion to the inheritance tax threshold, so it is important to understand your inheritance tax position and review it regularly.
Inheritance tax is payable on the estate’s value upon death, including any property owned. You pay inheritance tax depending on factors such as the property portfolio’s size and type, the estate’s value at death, and who you are leaving your estate to.
Inheritance tax (IHT) and property is a complex area, and we always recommend you take professional advice so you are aware of all considerations that need to be made.
What is an inheritance tax?
Inheritance tax is the tax that is paid on the value of a deceased’s estate when they die. The value of the estate is calculated at the date of death and includes the value of assets less any liabilities that the deceased owned or had.
In the UK, inheritance tax is currently set at 40% on any value above the tax-free threshold of £325,000. This means that estates valued below this amount are exempt from inheritance tax, and those valued higher are liable to pay the tax on any excess over this threshold.
However, there are certain exemptions and reliefs available that can reduce the amount of inheritance tax where it is left to direct descendants such as your civil partner, spouse or children. This includes certain types of property and business assets.
It is the executor of the estate that has to pay the inheritance tax.
Are all properties subject to inheritance tax?
In general, most properties within a deceased’s estate are generally subject to inheritance tax, along with other assets in their estate. However, whether inheritance tax (IHT) is due depends on several factors, such as the value of the property, the value of the whole estate, the type of property and the relationship between the deceased and the beneficiary.
Certain types of property, such as agricultural property or land and buildings used in a business that the deceased controlled, may qualify for Agricultural Relief or Business Relief. In some circumstances, beneficiaries could inherit these types of property tax-free.
In most situations, if you pass on a home which is your primary residence to your husband, wife or civil partner, then there is no IHT to pay.
How is property inheritance tax calculated?
Inheritance tax in the UK is calculated based on the value of an estate at the time of death, which includes properties.
To calculate IHT due on property, you must add the property’s value to all assets in the estate, such as bank accounts, investments and other properties. All debts and liabilities owed by the deceased person are then deducted from this total value.
If the total value of the estate is below the inheritance tax threshold, then there is no tax to pay on the property or other assets in the estate. If the total value of the estate exceeds the IHT threshold, then IHT is payable at a rate of 40% on the excess.
There are exemptions and reliefs available which can reduce the amount of IHT to pay, such as:
- “residence nil rate band” is an extra allowance where direct descendants (including spouse, civil partner and children) inherit a home.
- In certain circumstances, married couples or civil partners can also transfer any unused portions of their nil rate band to the last surviving partner or spouse.
- Business relief on certain assets.
- Agricultural relief on certain properties.
Is it better to gift or inherit property?
Whether it is better to gift or inherit property depends on your specific circumstances and long-term aspirations.
Gifting a property transfers the ownership of a property whilst you are still alive. Gifting the property potentially reduces the value of your estate and the amount of IHT due on death. However, there are other tax implications, such as income tax and capital gains tax, to be considered.
Inheriting a property can also have its advantages. Suppose you inherit a property from a family member. In that case, you may be eligible for certain tax exemptions and reliefs, and it should be noted that properties inherited are exempt from stamp duty.
For example, a parent may look to gift a buy-to-let property to their children so that it is passed on tax-free in their lifetime.
Factors that need to be considered are:
- The gift is being made to a connected person, so there is a potential capital gains tax, as the gain is based on the property worth, not the value of the gift.
- Once the property has been gifted, any rent received from it will be subject to income tax which must be paid by the children to which it has been transferred.
- The children can do what they like with the property as soon as they own it, as the gift has to be without reservation of benefit. If the property is mortgaged, then stamp duty may need to be paid when the property is transferred.
What is the 7-year rule for inheritance tax?
The 7-year rule is in relation to the period of time after which certain gifts made during a person’s lifetime are exempt from inheritance tax.
Gifts made in the seven years before the date of death are considered to be a potentially exempt transfer and form part of the estate’s total value.
If you die within seven years of making the gift, then providing you have survived more than three years, the percentage inheritance tax on the gift reduces each additional year you survive.
For the seven years to count, the gift needs to be without reservation of benefit, so you can not gift a property and live in it rent-free. In this case, you will still remain the beneficial owner and the property will form part of your estate and count towards your IHT bill.
Get tax advice from Spotlight Accounting
At Spotlight Accounting, we are property tax experts, and our team of experts are here to help navigate the complexities of IHT planning. We can look at your estate, discuss your long-term aspirations and help you understand your options both with maintaining an income and mitigating any potential IHT bill.
Please get in touch to learn more about IHT or property tax planning.
What happens if you cannot afford inheritance tax to pay on a property?
Inheritance tax is usually due within 6 months of death. If the estate does not have enough funds to pay the IHT bill, then the executor or administrator needs to notify HMRC as soon as possible.
In some cases, HMRC may allow the estate to pay inheritance tax over a period of up to ten years if it can be shown that refinancing is not possible and selling the assets would cause severe hardship.
Do you pay inheritance tax on a property left to you in a will?
This depends on the property and the value of the deceased’s estate. If the estates’ assets are worth over £325,000, then IHT could be payable.
Weighing up the various taxes that come into play when transferring ownership of a property, such as income tax and capital gains tax, can make inheritance tax on a property hard to assess. In most circumstances, an individual will need to pay some form of IHT on their property.
To ensure you get the best advice tailored to your situation, you should seek expert help from Spotlight Accounting today!