Could Inheritance Tax for property investors really be 80%? - Kuits Solicitors Manchester
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Could Inheritance Tax for property investors really be 80%?

Could Inheritance Tax for property investors really be 80%?

11th December 2020 - Published by Kuits tax & estate planning team

Much press over the last few years has reported the increased taxation on property investors, both UK resident and not, and in particular those investing in residential property. However, it seems that the biggest tax threat for property investors is yet to come.

Inheritance Tax will in theory take up to 40% of your wealth before it is passed on to the next generation. However, whilst the official rate of Inheritance Tax is 40% for property investors, particularly those investing via corporate structures, the true rate could be nearer to 80%. Take the following example:

A property investor buys a commercial property via an investment company for £1m. The property increases in value to £2m, then the company refinances the property and buys another for £1m, which again over time increases in value and is refinanced, and so on. At the death of the property investor, the company is now has properties worth £15m with a combined base cost of £6m. Assuming the property investors other assets use up any available Inheritance Tax allowances, then the £15m company will be subject to 40% tax, giving a tax charge of £6m. 

Funding the tax

How would you find the tax in that example? The tax is payable over ten years, but interest runs on the unpaid tax. The company would need to pay a dividend of around £1m a year for ten years just to pay the annual instalments, whilst the annual instalment is £600,000 the dividend would be subject to Income Tax at up to 38.1% before it can be used to pay the instalments. Accordingly, a £6m tax bill actually requires £10m to pay it, equivalent to 66% of the value of the company.

The alternative to paying by instalments might be to sell property in the company and then pay it out as a larger dividend to cover the tax in one go, but this actually creates an even worse result as not only do we have the Inheritance Tax and Income Tax charges, but the company will also pay Corporation Tax on any gain on property being sold. We have seen examples where such scenario pushes the overall tax cost to just under 80% of the value of the company.

What you can do

So often, property investors realise too late the potential tax disaster that will occur upon their deaths. To mitigate this, there are lots of options planning property investors can consider, including:

1. Gifting shares to the next generation – the gift may be subject to Capital Gains Tax so here you are paying tax to avoid tax

2. Ensuring property investments are spread across the family rather than just in one person’s name from the outset

3. Creating growth shares to at least pass future value to the next generation

4. Using more than one company for investment to give greater flexibility in planning in the future

Experience tells us that no planning solution will fully mitigate the taxation, but the earlier planning is started, the quicker the opportunity is to reduce the tax.

Get in touch with a tax lawyer in Manchester

If you would like advice on anything mentioned in this article, please call specialist tax partner Paul Bricknell on 0161 838 7860 or email

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