Owning a property can be a valuable part of your asset base. After all, it potentially gives you a place to live mortgage-free in retirement (taking pressure off your pension savings). It can also be efficient for inheritance tax (IHT) – letting an individual pass down an extra £175,000 without IHT if the family home is left to “direct descendants”.

However, what about additional properties, such as Buy to Let landlords? Here, things get more complicated from an IHT perspective. Indeed, it can be difficult to “shield” such property investments since the government views them as exactly that – investments, not a place for you to live and remain secure in retirement.

Below, our Carlisle financial planners explain how IHT works in relation to additional properties. We also offer ideas about how owners can prepare their estate plans in 2023-24. We hope these insights are useful to you.

Please contact us for more information or to speak with a financial adviser:

t: 01228 210 137
e: [email protected] 


How does IHT affect additional properties?

To recap how IHT works in the UK, this is typically levied at 40% on the value of an individual’s estate when it exceeds £325,000. So, if someone dies in 2023, owns his £500,000 home outright, holds no other assets and still retains his full IHT allowance, then 40% IHT would likely be due on £175,000 (a tax bill of £70,000).

If, however, he left the property to his only child (a “direct descendant”), then he can use the “residence nil rate band” (RNRB) to “extend” his IHT-free allowance by another £175,000 – i.e. to a total of £500,000. In this case, therefore, his estate may pay no IHT at all.

To start exploring additional property and IHT, let us suppose that another individual owned her £300,000 flat outright when she died. She also owned a £500,000 additional property which she rented to tenants. Here, the RNRB does not extend to cover even a portion of the second property’s value. This is because it only applied to the “family home”.

Assuming she has no other assets, £200,000 of her IHT-free allowance could cover some of the value of her second property. However, £300,000 of the value would be subject to IHT. Without a properly-structured life insurance policy, or other liquid assets to cover the bill, her executors would likely need to sell one of the properties to raise the required funds.


How can I protect a second property from IHT?

To begin planning for IHT on additional property, it is important for owners to understand the wider tax landscape, key rules and exemptions. For instance, an individual can typically give away up to £3,000 per year (under their Annual Exemption) without the gift(s) getting counted as part of the estate for IHT purposes.

However, you cannot give away “chunks” of ownership in a second property which you own in your own name. Yet it could conceivably be done with shares of properties. Here, your property (or properties) would need to be structured inside a limited company, not held directly by you. Over 10 years, for instance, you could gift up to £30,000 (10 x £3,000) of the shares to a son, daughter or other beneficiary without worrying about IHT. However, given the high values of properties in 2023, this strategy is unlikely to protect your property portfolio completely.

In many cases, company owners can pass down business assets (e.g. to family members) with 50% or 100% IHT exemption using the “Business Relief” rules. However, these reliefs are not available to companies which comprise Buy to Let portfolios. This is because they are classed by HMRC as “investment businesses”.

Another option is to make a lifetime gift. This involves simply giving away your additional property to a loved one (you may need to pay capital gains tax (CGT) and hoping you survive the gift by 7 years. If so, no IHT would be due on the value of the assets. However, if you die within that timeframe, then 40% – or a “taper” rate – would be due. 

Life insurance can be a helpful way to cover a future IHT bill. This pays out a lump sum when you die, which could release the necessary funds to allow some property owners to keep their portfolios intact. However, the premiums can be expensive and you need to be confident that the policy would eventually pay for itself and achieve what it sets out to do.

Trusts are another area to look at. This involves transferring ownership of your additional property to the trust – thus removing it from your estate and potentially lowering the future IHT due. Trusts can be powerful estate planning tools, especially for property. However, there are many types and each one has its own rules and ways of working. Seek professional advice to explore these in more detail – and to effectively consider the other ideas mentioned above.



If you would like to discuss your financial plan and retirement strategy, then we would love to hear from you. Get in touch with your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.

Reach us via:

t: 01228 210 137
e: [email protected] 

This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.


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