It can’t be said enough: a successful investment portfolio is one that is diversified. And a diversified portfolio might just include some buy-to-let (BTL) properties. BTL properties provide income as well as capital growth. This does mean that you’ll incur some tax liability. To learn more about your options for IHT planning with a considerable BTL portfolio, read on.
This article does not constitute advice. Professional advice should be taken prior to acting on any part of it. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
What are the options for IHT planning with buy-to-let properties?
In general, there are three main approaches to IHT planning with BTL properties in your investment portfolio.
Gifting your buy-to-let properties
If you choose to gift a property then this is considered a disposal when it comes to capital gains tax (CGT) and you will owe tax on any gains. But if the gain is too much then you’ll get hit with an unwelcome CGT tax bill.
However, if you hold onto your property until you die then the gain will be wiped away. Unfortunately, this doesn’t help when it comes to IHT payable on your estate.
If you gift to an individual then you will be a potentially exempt transfer (PET) for IHT and the seven year rule for gifting goes into effect. You could also gift to a discretionary trust, but these can be quite complex so if you’re interested in going this route, speak with a financial adviser.
Selling your buy-to-let properties
One of your other options is to sell your buy-to-let property and use the profit as the solution to your IHT planning. However, this also is considered a disposal for CGT purposes. You could even incur tax over the annual exempt amount (AEA) of either 18% or 28%. There are options for what to do with the gain to delay payment of that, though, in the form of an EIS. With an EIS you get income tax relief and it will fall off your estate in two years as far as IHT planning is concerned. It can be a bit of a risky strategy, so if you’re more risk-averse, this might not be the best approach for you.
Using a life coverage policy to cover the liability
If you don’t want to sell your buy-to-let property, then another option to cover your IHT liability would be to take out a life insurance policy.
When you are considering using life coverage to pay for your IHT liability, it’s important to remember that it will need to be a life cover plan wrapped inside a trust. Doing it this way uses an exemption like the annual gift exemption or the normal expenditure out of income exemption. This can be used to cover the premiums you’ll owe for your life coverage policy. Luckily, the rental income from your BTL property counts toward the acceptable income that will allow you to use this particular exemption.
As you can see, there are many ways you could handle IHT planning when you have buy-to-let properties. As there is so much involved with this kind of financial planning, it’s always advisable to consult with a financial adviser.
For the best outcomes, work with a professional
It can be quite difficult to wrap your head around IHT planning when you’re dealing with buy-to-let properties. No matter which option you choose, the good news is that you don’t have to go it alone. Working with a financial adviser will ensure that you’re considered from all angles and have carefully planned for your future. To discuss your options, contact the experts at Dental & Medical Financial Services today.