Inheritance Tax (IHT)
Inheritance Tax (IHT) is a tax charged on the estate, the total value of property, money, and possessions, of someone who has died. It is paid by the estate, not by beneficiaries personally: the executor or personal representative calculates what is owed, files the IHT400 return with HMRC, and settles the tax before probate is granted and assets are distributed. HMRC's guidance on Inheritance Tax sets out the thresholds, rates, and filing obligations.
IHT is particularly relevant to landlords because a buy-to-let portfolio typically represents a substantial and illiquid proportion of an estate, the relief available to trading businesses does not apply, and the value of property assets has grown significantly while thresholds have remained frozen.
The thresholds: nil-rate band and residence nil-rate band
Every individual has a nil-rate band (NRB) of £325,000. Anything passed to a beneficiary up to this amount is free of IHT. The NRB has been frozen at £325,000 since 2009 and, following the Autumn 2025 Budget, will remain frozen until at least April 2031, meaning rising property values pull more estates into the IHT net each year.
Where a person's main residence is passed to direct descendants (children, grandchildren, step-children, or adopted children) on death, an additional residence nil-rate band (RNRB) of £175,000 may also be available, bringing the combined tax-free threshold for a single person up to £500,000. The RNRB tapers away by £1 for every £2 that the total estate exceeds £2 million, disappearing entirely for estates above £2.35 million.
Married couples and civil partners can combine their allowances. If the first spouse to die does not use all of their NRB and RNRB, the unused proportion transfers to the surviving spouse's estate. A couple can therefore jointly protect up to £1 million from IHT, £650,000 in combined NRBs plus £350,000 in combined RNRBs, provided the residential conditions are met.
The rate: 40% (or 36% with charitable giving)
IHT is charged at 40% on the value of the estate above the available nil-rate bands. A reduced rate of 36% applies if at least 10% of the net estate, the value above the NRB, is left to qualifying charities. For large estates, the 36% route can produce meaningful savings while also benefiting a chosen cause.
IHT and buy-to-let portfolios: the Business Property Relief exclusion
This is the point that most affects landlords directly. Business Property Relief (BPR) allows qualifying trading businesses to pass to the next generation free of IHT or with significantly reduced IHT. However, under section 105(3) of the Inheritance Tax Act 1984, a business consisting wholly or mainly of making or holding investments does not qualify for BPR. HMRC treats residential buy-to-let portfolios as investment businesses, not trading businesses, regardless of how many properties are involved or how actively they are managed.
This means that a landlord who owns rental properties personally cannot use BPR to shield those assets from IHT. The full market value of the portfolio, net of any outstanding mortgages, is included in the estate and potentially taxed at 40%.
From working with self-managing landlords across the UK, August finds that many landlords assume their rental portfolio constitutes a business in the way their accountant or letting agent describes it, and are surprised to learn that "business" for BPR purposes means a trading business, not an investment business. The distinction is critical and worth raising with an estate planning adviser well before the portfolio reaches a value where IHT becomes a serious exposure.
Paying IHT on property: the instalment option
IHT is generally due within six months of the end of the month of death, with interest accruing after that. For property in the estate, including buy-to-let portfolios, executors can elect to pay IHT in ten equal annual instalments rather than as a single lump sum. This instalment option is designed to prevent forced sales, since property cannot always be liquidated quickly. Interest applies to outstanding instalments. If the property is sold, any outstanding IHT balance becomes immediately due.
The April 2027 pension changes
Currently, defined contribution pension funds sit outside an individual's estate for IHT purposes, making pensions a valuable tool for passing wealth tax-efficiently to the next generation. From 6 April 2027, under provisions announced in the 2024 Autumn Budget (and confirmed in Autumn Budget 2025), most unused pension funds will be brought within the estate for IHT. This is a significant change for landlords who have relied on pension funds as an IHT-efficient legacy alongside a property portfolio that cannot use BPR.
The change means that a landlord with a large pension pot and a substantial property portfolio may find that both are now potentially subject to IHT on death. Where a pension is passed to a spouse or civil partner, the spousal exemption continues to apply, but on the second death, the accumulated pension value will be included in the estate. The legislation is expected to be finalised ahead of the April 2027 implementation date; specialist financial advice is advisable for any landlord with meaningful pension savings.
Planning considerations for landlords
Because buy-to-let portfolios do not qualify for BPR, landlords must rely on other planning routes to reduce IHT exposure. The most commonly used include:
Gifts: assets given away during your lifetime become potentially exempt transfers (PETs) and fall outside the estate if you survive for seven years after the gift. A gift of a rental property or cash generates a CGT event, however, see our Capital Gains Tax definition for how this interacts. Gifts with reservation of benefit (where you continue to benefit from the gifted asset) do not reduce your estate.
Spousal transfers: all transfers between UK-domiciled spouses and civil partners are fully exempt from IHT, both during lifetime and on death. Ensuring property is held jointly or transferred to a spouse can delay, though not eliminate, the IHT liability.
Life insurance in trust: a whole-of-life policy written into an appropriate trust can provide a lump sum to pay the IHT bill, without the payout itself becoming part of the estate. This is a common approach for landlords who want to preserve the portfolio for their heirs.
Incorporation: holding rental property through a limited company changes the asset from rental property to shares, which in some structures can offer different planning opportunities. This is complex, carries its own CGT and SDLT considerations, and requires specialist advice.
For practical guidance on managing tax across your property portfolio, see our landlord's guide to managing tax. If you have inherited a property and are deciding what to do with it, our guide to selling an inherited property covers the key considerations.
Frequently asked questions
Does buy-to-let property qualify for Business Property Relief?
No. HMRC treats residential buy-to-let as an investment activity, not a trade. Section 105(3) of the Inheritance Tax Act 1984 excludes businesses that consist wholly or mainly of making or holding investments from qualifying for BPR. This means a buy-to-let portfolio is included in the estate at full market value for IHT purposes, with no BPR reduction available. A holiday let or serviced accommodation business may in some circumstances qualify as a trading business, this is fact-specific and requires specialist advice.
When must IHT be paid?
IHT is due no later than six months after the end of the month in which death occurred. Interest charges apply from that deadline. For property assets, including buy-to-let portfolios, the executor can elect to pay in ten annual instalments, but interest applies throughout, and the full balance falls due if the property is sold.
What is the inheritance tax threshold for 2025/26?
The standard nil-rate band is £325,000 per person. An additional £175,000 residence nil-rate band may be available where a main residence is left to direct descendants, giving a combined threshold of £500,000 for a single person. Married couples and civil partners can combine their allowances, potentially sheltering up to £1 million. Both bands are frozen until at least April 2031 under current government policy.
