Buy to lets and estate planning
Choosing to invest in property is a big decision and can bring long term rewards both during your lifetime and afterwards, for your family. Many people choose to purchase a buy to let property in order to provide a ‘pension’ for themselves in later life. It can also be passed down to family, who can either use it as a home or continue letting it out to supplement their income.
But what are the tax implications of having a buy to let property, and where does it feature in your estate planning? Let’s look at these key questions here.
Buy to let investments and Inheritance Tax
With buy to let investments, it’s the equity in your portfolio, not the market value, that counts for Inheritance Tax (IHT) purposes. Any equity forms part of your total estate, and if the threshold of all your assets is below £325,000 (or £650,000 if you’re married), your beneficiaries won’t need to pay Inheritance tax.
However, if your estate is worth more than the threshold, anything above the £325,000 will be liable for 40% Inheritance Tax, and you’ll have to plan so that your loved ones don’t face difficulties paying it after your death.
Inheritance Tax must be paid upfront within six months of your death – that’s before most beneficiaries have even received a penny from the estate themselves. If the majority of your estate is tied up in property, it can provide an additional headache for those who stand to inherit.
Luckily, there are several ways to help your loved ones out. With some guidance from a reputable Kent tax advisor, you can ensure the administration of your estate goes as smoothly as possible for them while they are grieving.
How to manage your estate for IHT purposes
Depending on your portfolio, circumstances, and other tax liabilities, you could do any of the following:
- Take properties outside your estate. This can be costly in the short term, but in the long term can prove efficient. You’ll need to seek your mortgage company’s agreement if the investments are mortgaged, as well as the advice of an accountant.
- Save cash for the IHT liability. Again, it’s highly recommended that you do this with the assistance of an accountant, who can help you value your estate and make a savings plan to cover at least some portion of the Inheritance Tax in cash.
- Take out life insurance. You could take out a life insurance policy that enables your executors to cover the IHT liability with the payout they’ll receive. Life insurance is fairly cost-effective on the whole, but can be prohibitive if you are elderly or suffer with specific health issues.
A note on Probate
If you have multiple properties in your name, the cost of Probate can become expensive for your beneficiaries too. When planning, it’s therefore a good idea to consult a Kent accountant for Probate services to find out how these costs can be mitigated. It could involve something as simple as keeping a document with your Will that outlines all your assets and which institutions hold them.