Here, we break down how inheritance tax applies to large portfolio landlords and why estate planning is essential.
Estate planning isn’t always a comfortable topic, but for landlords, it’s essential. Understanding what happens to your properties, mortgages, and tax position when you die can save your loved ones stress and a very large tax bill.
In our recent webinar, tax adviser Sean Hughes and key account manager at Foundation, Jack Gerasimov, broke down the fundamentals of how inheritance tax (IHT) applies to buy to let landlords, what happens to your mortgages, and why having a will matters.
Please seek professional tax advice before making any property investment decisions.
What is inheritance tax for landlords?
Inheritance tax is a tax on the value of your estate (everything you own) when you pass away. For landlords, this typically encompasses:
• Your buy to let portfolio
• Your home
• Any cash, investments, or other assets
Put simply, you add up all your assets, including property values, and subtract all liabilities (mortgages and debts). The result is your estate.
Everyone gets a £325,000 nil-rate band. For estates of £2m or less, an additional allowance of £175,000 called the residential nil-rate band may also be available, thus bringing total allowances of £500,000 per person, or £1,000,000 for a married couple.
Any estate amount above the allowances may be taxed at 40%. Although leaving assets to a spouse or civil partner is tax-free.
Because the £325,000 threshold hasn’t changed for nearly 20 years, but property prices have, even landlords with modest property portfolios can quickly cross the tax threshold, reinforcing the importance of proper estate planning.
Inheritance tax in practice
Imagine your own a property portfolio valued at £1,000,000, with outstanding mortgages of £500,000:
Your net estate: £500,000
Deduct your £325,000 nil-rate band (assuming the residential nil-rate band is not available), which leaves £175,000 taxable at 40%.
In this example, your family could face a tax bill of £70,000 simply for inheriting your properties.
What happens to buy to let mortgages when you die?
While lenders try to be as flexible as possible in the event of a death, the buy to let mortgage will need to be resolved. Generally, you can expect:
• Lenders will offer a grace period (typically 6 months) to allow the estate to organise the next steps
• As buy to let properties are self-financing, the mortgage must continue to be paid throughout the grace period
• If the mortgage is in joint names, it usually transfers to the surviving borrower
• If there is a tenants in common set up, the lender will work with the estate to confirm plans
• If you are a sole borrower, the lender may expect repayment either through the sale of the property, refinancing, or inheritance arrangements
What happens if you die without a Will as a landlord?
If you die without a Will, you are legally considered to have died ‘intestate’, which means:
• The law decides who inherits your assets, not you
• Your estate may pass to children, parents, or the next legal relative
• The process often takes longer and is more expensive
What’s important to note is that the inheritance tax calculation does not change regardless of whether you have a Will or not. However, having a Will in place gives you control over who your property goes to, how it's managed, and who handles the process.
How Probate Works for Landlords and Property Investors
Whether or not you have a Will, probate is the legal procedure that:
• Officially appoints an executor
• Values your estate (including property)
• Confirms inheritance tax owed
• Distributes assets to beneficiaries
Because property is involved, probate is almost always required. Proper planning can significantly reduce the complexity for your heirs.
Why estate planning is so important for portfolio landlords
Estate planning is one of the most important steps you can take to protect the wealth and property portfolio you’ve worked so hard to build. Without proper planning, your heirs could face unnecessary delays, stress, and a substantial tax bill.
Understanding the basics and preparing now is the first step toward making more strategic decisions for the future of your property portfolio.
For more strategies and expert advice, watch our webinar, ‘Inheritance Tax and Estate Planning for Portfolio Landlords’, on demand here.
MFB can help you with mortgage structuring and refinancing. Get in touch today to speak to one of our experts.
For tax advice, please contact our recommended advisor, Comprehensive Tax Planning.
