Planning for Inheritance Tax (IHT) on Your Property Portfolio
Posted on 21st August 2024 at 12:58
Inheritance Tax (IHT) is an important consideration for property owners, especially with rising property values potentially pushing more estates over the IHT threshold. Effective planning can help you minimise the tax burden on your heirs and preserve more of your wealth for future generations.
Here’s what you need to know:
Understanding the IHT Threshold
Currently, the standard IHT threshold is £325,000, which means that any estate exceeding this amount may be subject to a 40% tax. However, the Residence Nil Rate Band (RNRB) offers an additional allowance, currently up to £175,000, when passing on a main residence to direct descendants. This brings the potential tax-free allowance to £500,000 for individuals or £1 million for married couples or civil partners.
Steps to Minimise IHT on Your Property Portfolio
1. Utilise the Residence Nil Rate Band (RNRB):
- Ensure that your main residence is left to direct descendants to take advantage of the RNRB, thereby increasing your tax-free threshold.
2. Gifting Property:
- Consider gifting property to your heirs during your lifetime. If you survive for seven years after making the gift, it will fall outside your estate for IHT purposes. However, be aware that there may be issues with CGT, Stamp Duty on transferring the property or Income tax ("gift with reservation") rule, which can negate this benefit if you continue to benefit from the property.
3. Setting Up Trusts:
- Trusts can be an effective way to manage your estate and reduce IHT liability. Placing property in a trust allows you to retain some control over the asset while potentially reducing the taxable value of your estate.
4. Life Insurance Policies:
- Taking out a life insurance policy designed to cover your IHT bill can ensure that your heirs don’t have to sell assets, such as property, to pay the tax. Ensure that the policy is written in trust so that it doesn’t increase the value of your estate.
5. Downsizing:
- If your current property is large and valuable, consider downsizing to release equity and reduce the value of your estate. The RNRB can still be applied to the value of the property you sell, under the downsizing rules.
6. Regularly Reviewing Your Will:
- Ensure your will is up-to-date and reflects your current wishes. Regularly reviewing your will, especially after major life events, helps to align your estate plan with current tax laws and family circumstances.
7. Seek Professional Advice:
- IHT planning is complex, and the rules can change. Working with a specialist in property tax can help you navigate the intricacies of IHT and ensure that your estate is structured in the most tax-efficient way.
Conclusion
Proper planning for Inheritance Tax is crucial for property owners who wish to protect their wealth and ensure a smooth transfer of assets to the next generation. By understanding the rules and exploring strategies like the RNRB, gifting, trusts, and insurance, you can significantly reduce your estate's IHT liability. At Property Tax Advice, we’re here to help you with expert guidance tailored to your unique circumstances. Contact us today to start planning your estate with confidence.
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Tagged as: Inheritance Tax, Landlords
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