Many landlords accumulate significant equity in their property portfolios over time, yet few consider alternative strategies to manage this wealth effectively, particularly in relation to inheritance tax (IHT). A recent survey by Property118 highlights that while many established landlords have low or no borrowing against their properties, the equity often remains idle, potentially exposing their estates to substantial IHT liabilities.

Understanding the inheritance tax challenge

For landlords with sizeable property portfolios, equity can represent a considerable future tax burden. For example, £1,000,000 of equity left untouched could face a 40% inheritance tax charge, equating to a potential £400,000 liability. This looming tax bill often goes unaddressed until landlords reach their 60s or older, by which time some financial options may no longer be available.

Many landlords accept this tax exposure as an inevitable future cost. However, there are strategies to reposition this capital to mitigate the impact of inheritance tax, rather than simply leaving the equity to accumulate tax liabilities.

Business Relief investments as a strategic option

One such strategy involves leveraging Business Relief (BR), a tax relief that can exempt certain investments in qualifying trading businesses from inheritance tax after a two-year holding period. Investments through providers like Octopus can qualify for BR, allowing landlords to reposition equity into assets that fall outside their estate for IHT purposes.

Crucially, these investments remain accessible during the investor’s lifetime, meaning landlords are not relinquishing control or giving money away, but rather reallocating their capital to reduce future tax exposure.

Important note: This approach is not a direct investment recommendation or financial advice but is presented here for educational purposes.

Why landlords are borrowing to fund BR investments

Instead of using existing cash reserves, some landlords choose to refinance part of their property portfolio to release capital for BR qualifying investments. While taking on debt to invest outside property may seem counterintuitive, the rationale lies in balancing costs and outcomes.

The primary goal is not necessarily to outperform borrowing costs but to reduce inheritance tax liability on the invested capital after two years. Viewed through this lens, the strategy focuses on managing future tax exposure rather than generating investment yield.

Practical implications of this strategy

When applied carefully, this approach can gradually reshape a landlord’s exposure to inheritance tax. It introduces liquidity into the estate and begins to reduce IHT exposure after the two-year holding period, all while preserving the property portfolio intact. Additionally, the flexibility to reverse the arrangement by liquidating the investment and repaying debt provides optionality if circumstances change.

Risks and considerations

It is essential to recognise that this strategy carries risks. Borrowing introduces ongoing costs and lender requirements, while Business Relief investments involve capital risk and depend on the qualifying status of the underlying businesses. This is not about replacing one certainty with another but about choosing which risks a landlord is comfortable managing.

An invitation for established landlords

Landlords with established portfolios and modest borrowing levels who are considering how to optimise their assets for the future may find value in exploring these ideas further. Property118 offers free initial discussions to help landlords understand how their portfolios function as a whole and what strategies might be appropriate going forward.

Source: Based on reporting from Property118

TLA Training Academy

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Landlords can explore the Academy here: https://landlordassociation.org.uk/tla-academy/

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TLA update

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