Why building a property empire also builds an Inheritance Tax problem

Many landlords will feel their biggest costs are rising interest rates and income tax on profits, but the real danger could be the inheritance tax (IHT) bill growing inside your property portfolio.

Helen Kent-Woolsey, Senior Tax Adviser explains how this can often be a bill that’s growing faster than the value of the properties themselves.

The cause of the problem

Between January 2000 and January 2026, the average purchase price of a property in the East of England rose by nearly 300%. So, for those invested in property over the long term, the return on your original investment has been strong.

However, the IHT nil rate band has simply not kept pace with this rise, increasing by just 39% over the same period to the present value of £325,000, (itself frozen until 2031).

So with the increase in value of bricks and mortar outpacing the nil rate band (NRB) to such an extent, even modest property portfolios will now give rise to a large IHT bill. As a result, for those holding property – now is an important time to give some thought to your IHT position.

But isn’t the first £1m of my estate free of IHT?

The Government is keen to promote a headline wealth figure of £1m, below which, assets are not taxed to IHT. However, this headline does not tell the whole story.

The figure of £1m is reached by taking the NRB of £325,000, plus the residence nil rate band (RNRB) of £175,000, totalling £500,000. If your spouse or civil partner predeceases you and did not use their own nil rate bands, these can be transferred over for use on your death – giving you the remaining £500,000

So the headline makes a number of assumptions – firstly that you have access to the transferred bands from your spouse or civil partner, secondly that your estate meets the criteria to use the RNRB, and thirdly that the overall value of your estate is under £2m.

The RNRB is available where on your death your estate includes a home (or assets representing a home if you have downsized) which you have left to your direct descendants. However, the RNRB is tapered away where your estate is over £2m. and is not available at all to an individual estate worth over £2.35m.

Therefore once you tot up the value of your home, property portfolio, investments, ISAs and pensions (from April 2027), many estates will breach the taper threshold, and thus the £175,000 RNRB will not actually be available.

Is there any other relief for my property business?

Property businesses are not generally considered to be trading businesses by the tax legislation and therefore will not qualify for Business Property Relief (BPR).

Whilst numerous cases have been appealed in the courts, in nearly all cases, the conclusion has been that ‘owning and holding land in order to obtain an income from it, is generally to be characterised as an investment activity’.

Not only does the investment activity itself not qualify for relief. Where it is combined with a trading business – such as within a company or a group, it risks tipping the scales such that the whole business could fail to qualify for BPR.

How costly is the problem?

Inheritance tax on assets over £1m (assuming you do get the full £1m – see above), is charged at 40%. But if you happen to fall into the band £2m-£2.35m where each additional £2 of asset value results in £1 lost from your RNRB, then the marginal rate is up to 60%.

Your property business may need to be broken up and properties sold off in order to fund the IHT bill. Whilst tax on property assets can be paid in instalments over ten years, this is not interest free and ceases to be available if the property is sold.

So, what could I do?

The important thing is to start planning early. Having put time and effort into building your property empire, it’s worth also investing serious thought into what happens next.

Making gifts during your lifetime can manage your IHT exposure as the nil rate band refreshes every seven years. However, giving away an asset may result in a capital gains tax (CGT) cost which will need to be funded, alongside the knock-on effect of the loss of the property income.

Gifts of property into trust can be a way of protecting assets for future generations or a wider class of beneficiaries if you wish to include non-family members. Gifting into trust can also delay the CGT cost, by holding it over into the trust.

You could also consider restructuring the assets in your estate, for example borrowing against the properties on an interest only basis to release cash which can then be gifted in your lifetime. The outstanding borrowings would then reduce the value of your net estate.

A detailed review of the current funding structure and asset values would be necessary to make sure this was appropriate to your circumstances, especially considering current and anticipated volatility in interest rates, and the restriction on deducting residential finance costs for income tax purposes.

It may also be possible to incorporate your property business, or to transfer properties into a family investment company, which would enable any future increases in value to arise outside your estate. There are a number of tax implications to this area of planning so specialist advice should be taken.

If protecting your property portfolio from being broken up is a concern, then you may wish to consider a life insurance policy (written in trust) to fund the IHT.

Traps for the unwary

When making a gift, first consider the CGT consequences as you’ll be making a deemed disposal of that asset even though there are no proceeds. This is particularly costly where the property was bought many years ago and is standing at a significant gain.

Under normal circumstances a gift of a property will not be subject to Stamp Duty Land Tax (SDLT). But this may not be the case if the property was subject to a mortgage and the recipient of the gift takes on the responsibility for that borrowing.

The saving on IHT from making a lifetime gift should always be considered against the benefit of the property remaining in your estate on death and being uplifted to probate value with no CGT cost.

And it’s important to remember that once gifted, anti-avoidance rules will prevent you retaining any benefit in that property without loss of the IHT benefits.

We’re here to help

The IHT problem for property portfolios isn’t a reason to panic, but it is a reason to plan.

If your property portfolio has outgrown your existing IHT planning, then our expert team can advise on your current exposure, and the options available to help you best guard your investment from IHT. Speak to Helen or one of the team by calling 0330 058 6559 or email hello@scruttonbland.co.uk