Property Letting Businesses and Inheritance Tax
A great number of landlords mistakenly assume that because their property letting business is of a particular size, or is in a company, that their income generating assets will not be subject to Inheritance Tax on their death.
The background is that qualifying assets (or “relevant property” to use the true term) used in a business will benefit from two different rates of “Business Property Relief” (BPR) from Inheritance Tax. The rates are 50% (giving an effective rate of 20% IHT i.e. 50% x 40%) or 100% (giving complete relief). Yes, landlords have a business but the question is does the business qualify at all?
The BPR rules (section 105 Inheritance Tax Act 1984) say that “a business or interest in a business….are not relevant business property if the business …. consists wholly or mainly of one or more of the following….dealing in securities, stocks or shares, land or buildings or making or holding investments”. Confusingly the term “business” is used in different contexts across Inheritance Tax and Capital Gains tax reliefs. A number of tax cases have previously tested this important point for landlords, and unless there is a very high level of additional services provided to the tenants then landlords will not qualify for BPR on their property assets as they are “investments”. It is difficult even for Furnished Holiday Lettings to qualify for BPR for instance. The size of the property letting business is irrelevant, as is whether the properties are owned in your own name or are in a company.
In your financial planning, you should review the potential impact of Inheritance Tax on your estate and what you wish to leave your beneficiaries. A number of tax planning options are available to you to reduce the impact of IHT on a property portfolio, including gifts, Trusts, and for companies Freezer Shares, though all need to be evaluated against other possible tax implications.
For more information on this subject, please contact Rob Durrant-Walker.