More than 600,000 British landlords face a “ticking timebomb” death tax due to the Government’s decision to keep allowances frozen, according to new research from RSM.
The accountancy firm’s analysis suggests that one in five buy-to-let (BTL) investors will have a retail portfolio that exceeds the current thresholds for paying inheritance tax (IHT).
Notably, RSM’s research indicates that the estates of around 50,000 extra landlords will be slapped with an inheritance tax bill compared to last year unless Chancellor Rachel Reeves takes action.
IHT is a tax charged by HM Revenue and Customs (HMRC) on the estates of individuals who have passed away. Estates take into account peoples’ savings, possessions, estates and recently pensions.
Inheritance tax is charged on the portion of estates that are valued above the £325,000 threshold at a rate of 40 per cent.
Britons are entitled to an additional £175,000 allowance which is reserved for their main residence if is passed down to children and grandchildren. Spouses are also able to combine allowances.
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Over 600,000 landlords will be liable to pay a so-called death tax, experts claim
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Since 2009, consecutive Governments have opted to freeze allowance thresholds across multiple levies. This has resulted in fiscal drag, which occurs when allowances remain over the same time while wages, inflation and prices rise.
When it comes to landlords, fiscal drag has been in effect during a period of soaring house prices. As a result, more property owners have been dragged into the death tax bracket.
During the Autumn Budget, the Chancellor confirmed that the income tax persona allowance and higher rate threshold will stay at their current rates of £12,570 and £50,270, respectively, until April 2028. However, from April 2028, these personal tax thresholds will be uprated in line with inflation.
As it stands, both inheritance tax rates will remain at their existing levels until at least April 2028 which means thousands of landlords will be pulled into the levy’s purview in the years to come.
Chris Etherington, a private client partner at RSM, is sounding the alarm that children and grandchildren of landlords are being handed a “ticking time bomb” when it comes to inheritance tax.
He warned that thousands of households will have to sell their properties in order to pay the HMRC charge if Rachel Reeves fails to adjust the tax brackets in the near future.
The tax expert explained: “Fiscal drag is pulling more landlords into the inheritance tax net and many families will simply have to sell up in order to fund the resulting tax bill.
“Some may not wait that long and feel it is the right time to sell up now, paying some tax now to avoid a larger liability later. Ultimately, it could be bad news for tenants.”
Etherington outlined that the UK property market may see around one tenth of available rentals wiped out if landlords, who are liable for IHT, sell just one of their properties to cover costs.
According to the RSM partner, this will likely lead to greater financial costs for renters as it will lead to greater upward pressure on prices.
As it stands, landlords in the UK have sold 300,000 more properties than they have purchased since 2016.
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Landlords could be slapped with “unintended” charges from inheritance tax
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Chris Norris, the policy director of the National Residential Landlords Association, added: “Most landlords only own one or two properties, but the freeze on thresholds means that they will get a bill.
“There are so many taxes that hit landlords who then pass on to tenants – inheritance tax just adds to that.
“It won’t drive a firesale of properties, but it will cause some landlords to sell if they can’t find a tax efficient way to pass on their portfolio, and use that money to fund their retirement instead.”
A Treasury spokesperson told GB News: “More than 94 per cent of estates will continue to pay no inheritance tax in 2024-25, and estates can pass on up to £1million without paying inheritance tax when a tax-free allowance is passed to a surviving spouse or civil partner.”
According to the Government, impact estimates do not factor in potential behavioural changes after the announcement of these measure to reduce their estate’s overall IHT liability.
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