Key takeaways
Property portfolios rarely qualify for inheritance tax relief
Most investment property businesses face significant inheritance tax exposure without planning.
The right structure can create valuable planning opportunities
Trusts and company restructuring may help preserve family wealth efficiently.
Early succession planning protects assets and future generations
Review ownership, wills and governance arrangements before problems arise.
For families with substantial property holdings, inheritance tax can represent one of the largest threats to preserving wealth across generations.
Whilst a lot of focus has fallen on Business Property Relief and Agricultural Property Relief since the changes to Inheritance Tax were announced in October 2024, Inheritance Tax planning has long been a challenge for those owning property portfolios.
In most cases, HM Revenue and Customs will view ownership of a property portfolio – whether by an individual or within a company – as an investment as opposed to a trading entity. This has significant implications for Inheritance Tax purposes because businesses which wholly or mainly hold investments do not qualify for Business Property Relief. On death, the value of such assets are therefore subject to Inheritance Tax at the current rate of 40% if held within a taxable estate.
Planning opportunities for individuals
Inheritance Tax planning for individuals who own property portfolios can be limited, or trigger other tax charges.
If considering making lifetime gifts of property, the usual Inheritance Tax rules will apply so that the donor must survive for seven years from making the gift and retain no benefit. If the donor is reliant on the income from the properties, then gifting may not be commercially viable. Similarly, if the property has increased in value, then a gift is a disposal for capital gains tax purposes, which could result in tax being paid by the donor when making the gift.
Instead of an outright gift, a property could be gifted into trust. This can allow the capital gains tax to essentially be deferred until a sale or transfer by the trustees. However, caution is required because a gift of assets exceeding a person’s Inheritance Tax free allowance (known as the nil rate band and currently £325,000 per individual) could result in an Inheritance Tax liability at a rate of 20% on the value exceeding the nil rate band.
Trusts can also provide greater control over how wealth passes down through the generations, whilst offering protection against divorce, bankruptcy and other risks affecting beneficiaries.
However, if for example a married couple have been managing the property portfolio there could be scope for them as partners to transfer the properties into a limited company without triggering a capital gains tax or stamp duty land tax charge. Once in a limited company, more planning opportunities become possible.
Planning opportunities for property investment companies
Holding property in a company structure brings more flexibility from a planning perspective.
During lifetime, shareholders can decide when to draw the income which can be more tax efficient for income tax purposes.
For Inheritance Tax planning purposes, corporate restructuring could allow the value of an individual’s shares to be frozen and new shares to be issued which would hold the future value of the company on the assumption the properties would increase in value over time. This increase in value would therefore be outside the original shareholders estate.
In certain circumstances it may be possible to restructure a property business so that the wider group undertakes sufficient trading activity for Business Property Relief to become available. Whether this is achievable will depend on the specific activities of the group and requires careful specialist advice.
Under the current rules, if such restructuring was achievable, this would mean the value of the shares up to £2.5 million would be exempt from Inheritance Tax, with any value in excess of this benefitting from 50% relief (in practical terms resulting in an effective rate of tax of 20% instead of 40%).
Given the nature of the assets and the complexity of the tax rules around planning with properties, it is important to obtain expert advice when considering these options to ensure they are applicable in your circumstances and to ensure they are structured correctly so that tax can be mitigated as far as possible on death.
Wider planning considerations
Effective succession planning is not simply about reducing inheritance tax. Property portfolios often involve multiple family members, company structures and funding arrangements. Ensuring the next generation is able to manage the portfolio efficiently and avoid disputes can be just as important as achieving tax savings.
As part of an effective review of Inheritance Tax planning, property owners should also ensure that their wills, powers of attorney and any shareholders' agreements are regularly reviewed as these documents are often the cornerstone of an effective succession plan.
Every property portfolio is different and planning that works for one family may be wholly unsuitable for another. Early review of ownership structures, company arrangements and succession plans can often identify opportunities to reduce inheritance tax and preserve family wealth for future generations.
Our Succession planning, wills, trusts and estates team work closely with property investors across the UK to help them navigate these issues and implement bespoke planning strategies. Contact us today to discuss how we can help.
