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Investing in property has, for many years, been viewed as a good way of providing income and capital growth. Indeed, many residential property investors view their portfolio as their pension.  

However, unlike sums drawn down from a registered pension, a property portfolio is almost certainly not going to pass to the next generation free of inheritance tax (IHT).

HMRC collected a record £4.9billion in inheritance tax in the last tax year. This growth is primarily as a result of rising property prices. When you take into account the fact that a residential property portfolio is unlikely to benefit from business property relief, additional rate relief, or the residence nil rate band, from a tax point of view, it begins to look like an expensive asset class to hold.

So, is it a lost cause? Should you just accept that your portfolio is going to bear a very high tax burden?

If you are committed to retaining an investment property portfolio, there are things that can be done that will reduce the IHT liability. However, the best results are achieved when you plan well in advance.

The starting point is always to make or review your will. If you’ve not done so, or have not reviewed your will in the last five years, you should do so immediately.

Secondly, you should carry out a review of your assets and future plans (preferably with a suitably qualified Financial Planner) to determine if you can afford to begin moving some of your property, or shares in your property, out of your estate. However, before deciding to give away property, you must always look at all the tax implications in the round, i.e. Capital Gains Tax (CGT), Stamp Duty Land Tax and Inheritance Tax. A gift will trigger a CGT charge if there are inherent gains in the property, but, in the right circumstances, these can be deferred by utilising trust structures.

Finally, if you are just beginning to build your portfolio, take advice at the outset as to the best way of holding those assets. Forward planning is key.

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