Yahoo Finance Half a million landlords face death tax ‘ticking time bomb’
One in five landlords in England face paying hundreds of thousands of pounds in death taxes because of a government freeze on allowances, analysis shows.
More than half a million buy-to-let investors have a portfolio that exceeds the Government’s inheritance tax allowance threshold, according to estimates from accountants RSM, with experts warning that accidental landlords are particularly at risk.
Chris Etherington, of RSM, said: “There is a ticking tax time bomb waiting for the next generation and there is little they can do about it. Thousands of families will not be able to meet a 40 per cent liability without selling up.”
The Daily Telegraph is campaigning to scrap the divisive 40 per cent death duty. More than 50 MPs including Liz Truss and Nadhim Zahawi have backed the move.
The widely unpopular levy is charged at 40 per cent on wealth over the £325,000 threshold, which has been frozen at the same level since 2009. Individuals have an extra £175,000 allowance towards their main residence if it is passed to children or grandchildren, and spouses can share their allowances.
James Wood, of the National Residential Landlords Association, said a rising number of buy-to-let investors risked being caught out by the inheritance tax trap.
“A tax rate of 40 per cent is huge,” he said. “It is another way in which the current tax regime is just not suitable for landlords.
“Inheritance tax is going to hit accidental landlords particularly hard – people who have for example moved in with their partner and kept their previous home, are unlikely to be aware of the implications of renting out their property and the huge tax bills it could attract.”
A single landlord living in London with an average portfolio worth £410,000 and a main residence worth an average £523,000, faces a potential inheritance tax liability of £173,200, according to calculations by wealth manager Charles Stanley. This excludes any other possible cash, investments and business interests.
Mr Wood added that a rising number of landlords were being pushed to incorporate as a limited company in order to reduce their inheritance tax bill. While incorporations can help landlords to reduce their tax liabilities, there are several pitfalls that can result in a substantial bill if the process is not navigated properly.
Anyone moving existing properties into a company structure must “sell” their property to the limited company, which can incur both capital gains tax and stamp duty. The liability can sometimes be reduced if the landlord qualifies for incorporation relief.
However, incorporating also often comes with higher accountancy costs when filing company results.
This could prove unaffordable for thousands of landlords, Mr Etherington added. “It is not an option for smaller landlords, you need a sizable business for it to make sense,” he said. “Over the past decade we have had smaller landlords being deterred from the market. Now they are also facing the inheritance tax issue on top of everything else.”
Mr Etherington noted that if landlords at risk of triggering inheritance tax sold just one of their properties to settle the bill, it could wipe out at least a tenth of the number of rental properties available on the market, putting more upward pressure on prices.
Isobel Greenshields, an 80-year-old landlord from Essex, told The Telegraph this week that she felt forced to transfer her rental property to her 18-year-old granddaughter much earlier than expected in order to avoid a big inheritance tax bill. “You’re making judgements – often bad judgements – because of these inheritance taxes,” she said.
The Telegraph’s campaign to scrap the divisive tax comes more than 15 years after the then shadow chancellor George Osbrone pledged to raise the inheritance tax threshold to £1m. The proposals were so popular that it was widely credited with deterring Gordon Brown from calling a snap election.
However, the inheritance tax basic threshold has remained at £325,000 for more than a decade and Chancellor Jeremy Hunt has now frozen it until 2028. So far, the proportion of families paying the levy has roughly doubled since the freeze.
The average inheritance tax bill cost £215,652 in the 2019/20 tax year, but is now projected to top £300,000 by 2033, according to estimates from the wealth manager Quilter.
A spokesman for the Treasury said: “Over 93 per cent of estates won’t pay any inheritance tax – with only the very wealthiest paying more than £7 billion a year to help fund public services like the NHS and schools.
“Landlords will pay less tax thanks to our cuts to stamp duty, and can claim tax relief on financing their property purchase and day-to-day costs incurred in letting out, such as replacing furniture and lettings agent fees. We’re also increasing the supply of affordable homes by investing £11.5 billion to build more of the affordable, quality homes this country needs.”
