Reduce inheritance tax when you buy UK investment property
There are plenty of reasons why investors from around the world chose to invest in UK property. These include:
- Providing income in retirement. When you compare how retirement income options stack up against buy-to-let property investment well, there’s no comparison.
- Fund further education
- Provide extra income, and reduce working hours
Others invest to provide legacy for their loved ones. Even those who don’t invest with this goal in mind often get to the stage where inheritance tax becomes an issue.
Remortgaging is a property investment tactic which offers you several benefits. For example:
- It could help you grow your portfolio faster.
- It lets you release capital gain without paying capital gains tax.
- When you remortgage to reinvest, the mortgage interest you pay could reduce your income tax liability.
In this article, we’ll discuss how remortgaging can help you reduce your inheritance tax bill. You’ll also discover some dangers of remortgaging for inheritance tax benefits.
Rapid portfolio growth with a remortgaging strategy
You may remember Barry. He’s an investor who took our advice about how to crush capital gains tax when you remortgage to invest. Over the period of 12 years, Barry has built a reasonable portfolio by investing in UK residential investment property.
He now owns 16 investment properties in Manchester, the Midlands, Bristol and London. To grow his investment property portfolio so quickly, Barry has used a remortgaging strategy. He’s been helped by a strong property market since the Global Financial Crisis, too. Here are the highlights of his portfolio:
- Its total value is £3,500,000
- He now has outstanding mortgages totalling £2,200,000
- His properties pay him net rental income of £54,000
He now only works a couple of days a week (“to stop me from getting bored,” he says). A few weeks ago, he came in to review his portfolio and catch up with the team. As you can imagine, he’s very happy with how his investment property is working for him. He’s also psyched that he’s going to be able to leave a real legacy to his children. Or he was until we discussed inheritance tax.
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When the Grim Reaper comes, the taxman holds his hand
Barry has worked hard to make sure that his property investments have worked hard for him. He’s put a lot of effort into making sure that each time he bought a new property, it was in one of the best places to invest in property UK. He’s invested mostly in positive cash flow properties. And they’ve provided life-changing income.
Throughout his property investment career, Barry has done everything he can to reduce his tax liability. When we told him that if he died tomorrow, his estate could have to pay £520,000 in inheritance tax, he nearly choked and spat out his coffee.
Now, he plans to give as much of his wealth away before he dies. To do this, he’s going to remortgage his portfolio to as high a level as he can.
How remortgaging can reduce your inheritance tax liability
You can make a gift to your children (or spouse) of any amount. Providing you don’t die within seven years of making the gift, there won’t be any inheritance tax to pay. However, if you gift property or other assets, it could be liable for other taxes. The main one is capital gains tax (CGT). The gift would count as a disposal, and you’d have to pay CGT.
Let’s say Barry’s portfolio increases in value to £5,500,000 over the next ten years. Meanwhile, he remortgages his properties to 80% of their value. As he remortgages, he gifts the cash raised to his children: a total of £2,200,000.
If he hadn’t remortgaged and gifted, the value of his children’s legacy would have been £3,300,000 (£5,500,000 – £2,200,000 of mortgages). On this, the estate would have an inheritance tax liability of £1,320,000. It would leave Barry’s children £1,980,000.
By using a remortgaging strategy:
- His children would now receive £2,200,000.
- Barry’s portfolio is worth a net £1,100,000 (£5,500,000 – £4,400,000 of mortgages).
- The inheritance tax liability is £440,000.
- In total, Barry’s children will receive £2,860,000. That’s almost £1 million more than had Barry not remortgaged his properties and gifted the proceeds.
Should you remortgage your portfolio to reduce inheritance tax?
On the face of it, remortgaging is the perfect strategy to reduce inheritance tax. Whether it’s right for you or not will depend on your personal circumstances. Remortgaging to give cash away could create some huge financial headaches:
- The first is that if you don’t live for at least seven years after you’ve made a gift, then the gift will still be liable to inheritance tax. What if your children have used the money, perhaps to buy their house? They could be forced to sell to pay the inheritance tax.
- Next, if you remortgage to give the cash away, you won’t be able to claim any tax relief on the interest payments.
- If you rely on the rental income from your investment properties, remortgaging so highly could put a strain on your finances. You’ll have less income to live on.
- If interest rates rise, the smaller cushion between rental income and interest payments could push your portfolio into negative cash flow.
If you’re thinking about remortgaging to reduce a future inheritance tax liability, you’ll need to plan thoroughly. You’ll have to consider your health, the future direction of interest rates, and your income needs.
Contact one of our team today on +44 (0)207 923 6100. We’ll help you identify the best places to invest in property UK. And we’ll help you to build a strategy to grow your UK property portfolio, maximise income, and reduce tax – today and tomorrow.
In our next article, we’ll explain how to avoid the day of reckoning when you remortgage to invest.
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