Frozen Tax Thresholds Put Landlords Under Inheritance Tax Pressure

The inheritance tax freeze and rising property values are dragging over 600,000 landlords into the death tax net, creating a costly problem that could force the sale of rental properties and disrupt the housing market.

Here’s how you can counteract these changes before they’re put in place.

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(Read Time: Approx. 3 minutes)

Topics Discussed:

• How frozen inheritance tax thresholds are pushing landlords into liability.
• The impact on families, tenants, and the property market.

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The Frozen Threshold and Rising Property Prices

Inheritance tax (IHT) remains a significant concern for landlords, particularly those with buy-to-let portfolios.

Currently, IHT is charged at 40% on the portion of an estate exceeding the £325,000 threshold.

An additional £175,000 allowance applies to a family’s main residence if passed to direct descendants, and spouses can combine allowances, totalling £1 million.

However, the key issue lies in fiscal drag: these thresholds have been frozen since 2009.

Meanwhile, UK property prices have soared, pulling more estates—and particularly landlords—into the inheritance tax net.

Analysis by RSM estimates that over 600,000 landlords are now at risk, with 50,000 more estates facing an IHT bill this year alone compared to last year.

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A Ticking Time Bomb for Families and Tenants

Experts warn that IHT liabilities are creating a “ticking time bomb” for the next generation.

Chris Etherington of RSM highlights that many families will be forced to sell their inherited properties simply to cover the tax bill.

For landlords, this raises a critical dilemma:

1. Sell Now or Wait? Some landlords may choose to sell their properties early, incurring capital gains tax now to avoid a larger inheritance tax later.

2. Impact on Tenants: If landlords sell to fund IHT bills, it could remove thousands of properties from the rental market, further squeezing supply and driving up rents.

The National Residential Landlords Association points out that most landlords own only one or two properties.

Yet, frozen thresholds mean they are increasingly caught in the IHT trap, compounding financial pressure from other landlord taxes and regulations.

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The Bigger Picture: Property Sales and Market Impact

The cumulative effect of inheritance tax and other property-related taxes has been profound.

Since 2016, landlords have sold 300,000 more properties than they’ve purchased, reducing rental supply and exacerbating affordability issues for tenants.

RSM’s analysis suggests that if landlords sell even a fraction of their properties to settle IHT bills, the market impact will be significant.

An estimated one-tenth of rental properties could disappear, further driving up demand and rents.

The October Budget intensified these challenges.

Changes brought private pensions into the inheritance tax net and expanded the reach of IHT, with 8% of estates expected to pay tax annually—double the 4% seen in previous years.

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Summary

Inheritance tax has become an unavoidable problem for landlords, thanks to frozen thresholds and soaring property prices.

Families inheriting buy-to-let portfolios face significant tax bills, often leading to property sales that shrink the rental market and drive-up rents.

The complexities of inheritance tax planning require proactive strategies to minimise liability and preserve wealth.

Whether you’re considering trusts, family companies, or selling properties ahead of time, expert advice is crucial.

Don’t let the “ticking time bomb” catch you off guard — contact Ilyas Patel Accountants today to explore the most tax-efficient solutions and safeguard your property legacy for future generations

Fill out our form here for any questions, give us a call at 01772 920579, or message us on our WhatsApp for out of office hours.

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Kind regards,

Ilyas Patel