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Inheritance Tax and landlords: Need to know

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Tax is complicated at the best of times. Inheritance Tax (IHT) is by no means any exception. If you are a landlord who has invested in one or two buy to let properties, inheritance tax might become still more involved.

And, just to make matters still worse, Inheritance Tax is a liability which you are likely to leave to your heirs and beneficiaries of your will to sort out after you have died.

Inheritance tax liabilities 

The principle is that you pay Inheritance Tax on all the assets, money, and property you own at the time of your death.

Currently, there is an allowance of £325,000, so the taxable amount is anything above that figure. If you are leaving the home in which you live to your spouse or children, you also qualify for an additional £125,000 allowance – so must pay Inheritance Tax on anything in excess of £450,000.

For many people, that might seem like a generous allowance, but if you are the landlord of buy to let property, the value of your estate may be considerably more than that initial £450,000 – and the Inheritance Tax payable on the balance is at the rate of 40%. 

If you have assets amounting to £1 million once your bank balances, any stocks and shares, family home and buy to let property is all taken into account, therefore, you qualify for a potential allowance of £450,000, but your estate must still pay 40% Inheritance tax on the remaining £550,000 – a tax bill of £220,000!

Who pays?

Valuation of your estate, the distribution of the assets and the payment of liabilities are all carried out by executors during the period of probate.

During that period, the executors – as trustees of the estate – must also ensure that any property remains adequately insured. And we have explained the importance of that precaution in our article on insurance for probate properties

Before the assets may be distributed to the beneficiaries in accordance with the wishes you expressed in your will, however, the estate’s liabilities must first be paid, including any Inheritance Tax. 

That might be a hefty bill – as the example of £220,000 mentioned above may show. In those circumstances, the executors – on behalf of those hoping to inherit your estate – may need to sell any buy to let property you owned in order to pay the Inheritance Tax liability and, as an article in Homes & Property on the 19th of March 2019 points out, in order to meet the executor’s fees. 

Making provision for meeting the Inheritance Tax bill 

With careful financial planning, you may be able to save such a burden falling on the shoulders of your intended heirs by making provision in advance for the bill you know is likely to be forthcoming from HMRC upon your death. 

One way suggested by the article is by saving enough for the expected Inheritance Tax demand and keeping that money in a separate account, for use by the executors of your estate. 

Alternatively, you might want to arrange a whole of life insurance policy that pays out when you die in an amount you expect to be broadly equivalent to your Inheritance Tax bill.