The Inheritance Tax Trap – Could Your Property Portfolio Be Subject To 40% Tax?

In this article, Chartered Financial Planner, Josh Richardson FPFS details how your property empire could leave your loved ones with a large Inheritance Tax Bill once you’re gone.

The Inhertiance tax trap

Many landlords have worked extremely hard to build up their property portfolios and these can often bring in good levels of income and capital growth over the longer term. However, many do not realise that by building up their own property empire they are often pushing themselves into the realms of Inheritance Tax (IHT).

Property Portfolios Held Personally

As a summary, IHT is a tax charged at death and is charged at a rate of 40%.

Everyone receives an allowance for IHT, which currently stands at £325,000. This is called the Nil Rate Band. In addition to this, an allowance is also available which can be offset against the value of an individual’s main residence. This is called the Main Residence Nil Rate Band and is worth £175,000.*

(*Please note, this allowance is extremely complex and there are many rules around who is entitled to it. For the purposes of this article, we have assumed in the examples that the individual’s benefit will qualify for the allowance. To assess your own circumstances and your own individual qualification for this allowance, please contact us.)

Overall, an individual has an allowance of £500,000 and, as a married couple, up to £1,000,000 could be passed to family or friends without IHT being charged. Anything above this will be subject to tax at 40%.

When it comes to a couple who are married or in a civil partnership, IHT is due on the death of the surviving partner. No tax is due on the death of the first partner as assets can pass to a spouse or civil partner free from IHT.

The following example highlights how a married couple’s estate could be liable to IHT:

Example 1:

Jane and Mark are married and own a property portfolio worth £800,000. They have some other assets, such as cash and cars valued at £190,000, and their own main residence worth £550,000. They have mortgages outstanding on the properties, with an outstanding balance of £225,000.

Mark passes away and leaves all of his assets to Jane. There is no Inheritance Tax due on Mark’s death.

Jane dies shortly after and passes everything to their daughter, Sarah. Jane’s IHT liability would be calculated as follows:

Property Portfolio


Main Residence


Other Assets




Less liabilities


Less Nil Rate Bands

Less Main Residence Nil Rate Bands


Value Subject to IHT


Tax at 40% 


As you can see from this example, the tax can soon add up. Additionally, the administration of an estate when IHT is owed to HMRC is not necessarily straightforward.

Sarah can settle the bill with HMRC from her own finances, but not many people have access to £126,000 at the drop of a hat.

Most people would look to use the other assets Jane had, or the equity in some of her properties. However, Sarah will not be able to use the money in Jane’s bank accounts or sell her properties until she has received Grant of Probate. Equally, Sarah will not be able to obtain Grant of Probate until the IHT bill has been settled with HMRC.

A vicious cycle, I know.

Landlords who fall into this IHT trap should consider how their IHT liabilities will be funded by the people they pass their assets on to.

Property Portfolios Held Within a Business

It has been common recently for individuals to build up their portfolios within a business structure, due to some of the tax advantages that this brings.

However, one of the tax advantages this does not bring is relief against IHT.

We have often heard of clients being advised incorrectly that the value of their business, which owns their properties, will not be subject to IHT due to an IHT exemption called Business Property Relief. Unfortunately, in many cases this is not the case.

Business relief is designed so that shares in qualifying businesses do not attract IHT when a shareholder dies. Its ultimately a way for the government to encourage small companies to be formed and developed, without the need for the business to be dissolved when someone dies to pay IHT.

Unfortunately, for businesses owning property, this is where there is a catch!

Business Relief is not available where a company is mainly involved in holding land, buildings, and investments. For landlords using a company to purely hold their investment properties, they are likely to fall into this category and therefore they won’t qualify for any Inheritance Tax relief.

In this scenario the full value of your property business is likely to be liable for IHT when you die. The following is an example of how this would be calculated on an individual’s death.

Example 2

Simon, who is single, is the sole owner and director of Property ZYX Ltd, which holds investment properties worth £900,000. There are no mortgages outstanding on his properties.

Simon dies and passes all assets to his son. The value of his estate, and his IHT liability, is as follows:

Business Value


Main Residence


Other Assets




Less Nil Rate Band


Less Main Residence Nil Rate Band


Value Subject to IHT


Tax @ 40%



Inheritance Tax can often sneak up on people. The value of their assets grows and suddenly their family are left with a large cheque to write to HMRC when they die.

IHT could almost be described as a ‘voluntary tax’. Obviously, this is not to say you have a choice whether to pay it when someone dies. However, if you plan early enough, the liability can often be mitigated, if not removed altogether.

Informed Financial Planning can offer advice on how to structure your finances accordingly to ensure your estate is as tax efficient as possible.

We can advise on your IHT position and potential solutions to any liabilities you may have. These solutions could include gifts to your family members, gifts into Trust, tax efficient investments or certain insurance products.

Each solution has its own pros and cons. All of our advice is bespoke, and we will be able to guide you through the solution that meets your objectives and fits your financial circumstances.

Please contact us to arrange a free, no obligation meeting to discuss your goals and circumstances further.

The Risk warnings associated with this article
  • Current levels of taxation, tax relief, regulation and legislation may change in the future, any tax relief depends on personal circumstances.
  • Investing in Business Property Relief qualifying investments should be considered as high risk as they may be made in small, unquoted companies and/or partnerships.
  • Capital is at risk. You may not get back what you’ve invested.