Inheritance tax planning essentials for property investors

If you have already added properties to your wealth, over and above your home, or are keen to start doing so, it is possible you have assets of sufficient value that your children or other beneficiaries may end up having to pay inheritance tax.

It is therefore essential to take specialist advice and carry out some careful inheritance tax planning, or you could end up leaving your beneficiaries a big tax bill.

Why is inheritance tax planning important?

HMRC does have means by which you can pass on your wealth to others and mitigate tax but, to do so legally, you have to seek the right advice and make sure the correct paperwork is in place, or it can become very complicated.

Due to ‘gifting’ rules set out by HMRC, some people think that if they sign over property to their children, after seven years the property will be free of any inheritance tax liability. This isn’t necessarily the case, nor is it necessarily sensible to sign properties over to beneficiaries early. 

The first thing to be aware of is that at the point you pass a property over to your children, you may become liable for capital gains tax and give yourself a large bill to pay.

Secondly, the rental income will now be theirs and may be taxed at their current rate of income tax. If that rate is higher than yours, it may be a more sensible financial move to hold on to the property yourself. 

What can you do?

In administering inheritance tax, HMRC and tax planning experts will take into consideration all of your assets, including your home. Although your Will is taken into account, the way you own a property means it may not necessarily end up passing on to the person you would like to inherit it.

This is a complicated matter and rules can change on a bi-annual basis, depending on what happens in the Autumn and Spring Budgets, so it is certainly not wise to try and plan by yourself without taking professional advice.

For example, if a couple own a property as ‘joint tenants’ and one partner dies, ownership of their half passes to the surviving partner. If you want to leave your half to either your children or someone else, then it is important that you legally own the property as ‘tenants in common’.

This requires some legal paperwork and it is important to make sure you take independent financial advice from someone who works closely with your legal representative, and that both have expertise in inheritance tax planning. 

In addition, property can be placed in a trust so that it is handed down through your bloodline. This is a useful means of safeguarding ‘birth rights’ for future generations as, if done correctlyit means the property wealth cannot be accessed by other spouses or their kin, if your children or beneficiaries get divorced and re-marry.

There are still tax implications from your properties being in trust, but they can be beneficial versus the implications of not doing so.

Another way your beneficiaries can secure money from your portfolio tax efficiently is to re-mortgage your existing properties - if there is sufficient equity to do so. Remember that the mortgage interest you pay is tax deductible, so it is always worth considering how much equity you hold in your property and the level at which you ‘gear’ your investment to secure better returns.

Whether you have already invested in property or are planning to add more property to your personal wealth, it is essential to seek expert advice from professionals who understand all the implications of buy to let investment, including mortgage, legal and tax advice.