Resi investors can dodge inheritance tax trap

Still, there are gaps in this approach. When we think of ‘traditional’ property investment, we might consider being a professional property investor (‘flipping’ houses), or investing in buy-to-let. Both can bring you returns but are time- and resource-consuming, and can often result in labour for investors, much of which isn’t predictable. There is also a lack of diversification unless you have a lot of money to invest. There is the option of hiring external parties to manage these processes, but this is an ongoing cost.

These strategies can incur good returns over longer periods, but weighing up the cost of managing logistics, short-term outlay, hiring support or sourcing tenants, it isn’t always the best option – particularly for investors who, say, have recently sold a business and have a windfall to manage. It is not a recipe for a relaxing retirement.

But there is a secondary, lesser-discussed issue with this strategy that is too often forgotten, and too often has serious repercussions: Inheritance Tax (IHT).

IHT receipts have risen astronomically since this time last year – by over £10bn, to be exact. While seasoned investors and those with a sudden windfall tend to be fairly hot on IHT management and relief, many put the matter on the backburner, and without a financial adviser – or real-life experience – what constitutes ‘relief’ can feel murky. What’s more, the average IHT bill is now over £200,000. Ignorance isn’t bliss, and it is costly.

It might not come as a surprise to most investors, but a significant proportion of estates is made up of residential property. Investments such as wholesale real estate or buy-to-lets fall into this very category; funnel capital into this type of property, and individuals are automatically augmenting their estates and therefore IHT eligibility.

This doesn’t discredit residential property as a viable form of investment, but there is an urgent need to adjust how we view such investments – in other words, a need to ensure an investment uses secured lending.

For the layperson, in this context, secured lending comes under HMRC’s criteria for qualifying activity – a fully compliant means to access Inheritance Tax relief while preserving or growing capital.

Spreading the risk

Secured lending also has the benefit that you are only lending up to 75% of the property values, so are protected against market fluctuations such as the 2008 financial crash, when markets declined by 19%, although obviously rebounded. Lending can also be spread over different projects and exit dates,  protecting the investor from entering all his investment at the top of the market in one property.

Business Relief is particularly appealing for former business owners, as they can retain full ownership of their capital, but don’t need to personally manage assets or investment strategies. Plus, investors can still access capital with some flexibility as a means of retirement income.

One such qualifying activity is investing in development. P1 Capital was founded under the very principle of enabling investors to retain ownership of assets, whilst ensuring they’re eligible for IHT relief – and eliminating costly management.

With property development investment, risk-adjusted returns could be as high as 7% to 10% a year within 18 to 36 months, depending on the terms of the investment.

A clause in investors’ wills can designate ownership to a loved one, and in this way could achieve full exemption from Inheritance Tax provided the assets are held for more than two years prior to the holder’s death. Business owners reinvesting proceeds do not have to wait for two years.

Bricks and mortar are still reliable, viable investments – and are likely to be so for many decades to come. But shifting how we think about property investments is imperative to reducing Inheritance Tax receipts, and avoid falling into the trap that could cost us and our loved ones vast amounts of money.

Mark Roughley is business development manager of asset management firm P1 Capital