Inheritance tax (IHT) is a tax that some people might have to pay when they inherit property or money from someone who has passed away. It is a tax that can significantly impact the amount of wealth left behind to beneficiaries, including landlords. However, there are ways in which landlords can minimise their IHT bill and preserve their wealth for future generations. In this article, we will discuss several strategies that landlords can employ to reduce their IHT liability, but our core recommendation is to make sure you consult a qualified Financial Advisor before making any decisions.

Understanding Inheritance Tax

Before delving into strategies for minimising IHT, it is essential to understand how the tax works. In the UK, IHT is currently charged at a rate of 40% on the value of an estate above a certain threshold, which is currently set at £325,000. Married couples and civil partners can combine their thresholds, giving a total threshold of up to £650,000.

Utilising Exemptions

One way in which landlords can minimise their IHT bill is by taking advantage of exemptions. These include:

Annual Gift Allowance

Landlords can give away up to £3,000 each year without incurring IHT. This allowance can also be carried forward for one year, allowing for a total gift of up to £6,000.

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Small Gift Allowance

Landlords can also make gifts of up to £250 to as many individuals as they wish each year without incurring IHT.

Business Property Relief

If a landlord owns a property rental business and passes it on to a beneficiary, the business may qualify for 100% relief from IHT.

Making Use of Trusts

Trusts can be an effective way for landlords to minimise their IHT bill. A trust is a legal arrangement in which assets are transferred to a trustee to be managed on behalf of a beneficiary. The assets are no longer owned by the landlord, and so they are not included in their estate for IHT purposes. There are several types of trusts that landlords can use, including:

Bare Trusts

A bare trust allows the beneficiary to receive the assets at any time, as long as they are over 18 years old. The landlord has no control over the assets once they have been transferred to the trustee.

Interest in Possession Trusts

An interest in possession trust allows the beneficiary to receive income generated by the assets while the landlord is alive. After the landlord’s death, the assets pass to the beneficiary.

Discretionary Trusts

A discretionary trust allows the trustee to decide how the assets are distributed to the beneficiaries. This can be useful if the landlord wants to ensure that the assets are used in a specific way, such as paying for a grandchild’s education.

Considering Life Insurance

Another strategy for minimising IHT is to take out a life insurance policy. The policy can be written in trust, meaning that the proceeds are not included in the landlord’s estate for IHT purposes. The payout from the policy can be used to pay the IHT bill or to provide an inheritance for the landlord’s beneficiaries.

Passing on Property

Landlords can also minimise their IHT bill by passing on their property during their lifetime. This can be done through a gift, which may incur IHT if the landlord does not survive for seven years after making the gift, or by selling the property to a beneficiary at a discounted price.

Conclusion

Inheritance tax can significantly impact the amount of wealth that landlords can leave behind for their beneficiaries. However, there are several strategies that landlords can employ to minimise their IHT bill, including utilising exemptions, making use of trusts, considering life insurance, and passing on property during their lifetime. By implementing these strategies, landlords can ensure that their wealth is preserved

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