 is often encountered as a single headline figure. For many families, it is framed simply as a 40% charge applied to wealth on death. In reality, the system is far more layered. Beneath the headline rate sits a structure of allowances, thresholds and conditions that have been built up over time and applied in a specific order, and when those layers are not fully understood, the difference between expectation and outcome can be substantial.

Small details often have an outsized impact: how a home is passed on, whether allowances are claimed correctly, or whether 

 made years earlier have already reduced what is available. To explore how inheritance tax works in practice, we spoke with 

, who helps families understand how these layers interact and why decisions made during life can materially change the final outcome.

The Nil Rate Band: A Foundation That Is Often Misread

. Each individual currently has an allowance of £325,000 that can be passed on at death without inheritance tax being due. Anything above that threshold is generally taxed at 40%. While this figure is widely known, the way it operates in practice is frequently underestimated.

The key point is that the nil rate band does not exist in isolation. Gifts made during the seven years before death are taken into account and can reduce the allowance available, meaning families may have less tax-free capacity than they expect 

. The allowance is also transferable between spouses and civil partners, allowing unused amounts from first death to be carried forward and claimed on second death 

Families face £3m inheritance tax bills on ‘failed gifts’

Inheritance tax: Wills and inheritance tax (TaxScape)

As Michelle explains:
“Each person has £325,000 that on their death can be gifted away without inheritance tax being due, but what people often miss is that gifts made in the seven years before death are taken into account.”

The Residence Nil Rate Band and Its Conditions

Alongside the standard nil rate band sits an additional allowance linked to the family home. The 

 provides up to £175,000 per person, but it comes with strict conditions that regularly catch families out.

To qualify, the property must be passed to direct descendants, such as children or grandchildren. Crucially, the allowance is also subject to a taper once the overall estate exceeds £2 million, reducing by £1 for every £2 above that threshold. In practice, this can result in the allowance being reduced or lost entirely.

What makes this particularly complex is that some assets which sit outside the estate for inheritance tax purposes still count towards the £2 million calculation. As Michelle notes,
“Some assets don’t trigger inheritance tax themselves, but they do sit within the calculation for whether the residence nil rate band is reduced.”

For families close to the threshold, this interaction can have a disproportionate effect on the final tax position.

Where Families Most Often Miss Opportunities

In practice, inheritance tax inefficiencies tend to arise not from complexity alone, but from lack of awareness. Many families are simply unaware of how many allowances are available or how they can be used together.

Annual gifting allowances, gifts on marriage and charitable donations are often underused 

. More significant opportunities exist through gifts made from surplus income, where regular excess income can be passed on without using any inheritance tax allowance, provided the gifts are genuinely habitual and properly documented 

Inheritance Tax and pensions 2027 changes — Schroders Personal Wealth

Work out Inheritance Tax due on gifts

 are another frequent blind spot. They are governed by expressions of wish rather than a will, and if left unchanged, pension wealth may be unintentionally channelled to a surviving spouse and later become subject to inheritance tax, particularly as the rules surrounding pensions continue to evolve.

Seeing Inheritance Tax as a Structure, Not a Number

A meaningful shift occurs when families stop viewing inheritance tax as a single charge and start seeing it as a broader structure. When 

, pensions and intergenerational planning are considered together, more flexible and effective solutions often emerge.

Michelle describes scenarios where paying income tax earlier can reduce inheritance tax exposure later. Drawing income at a higher tax rate and passing it down to the next generation can allow that money to be recycled more efficiently, for example through pension contributions in the children’s names.

“If you look at inheritance tax in isolation, you miss opportunities,” Michelle explains. “When you understand how the layers work together, you can often improve outcomes for the whole family.”

Communication, Timing and a Changing Landscape

One of the most persistent challenges in inheritance tax planning is a lack of communication. Financial decisions are often made in isolation, without considering how allowances might be used across generations.

This can result in wasted allowances, duplicated tax exposure and missed planning windows. Timing also matters. With pensions currently sitting outside the estate for inheritance tax purposes but scheduled to be brought into scope under future changes, strategies that work today may not remain effective indefinitely 

Inheritance Tax on pensions: liability, reporting and payment — Summary of responses

As Michelle puts it, “the tax landscape is constantly changing, and wealth planning needs to be adaptable rather than fixed.”

Inheritance tax planning is not a one-off exercise. It sits at the intersection of income tax, 

, pension rules and family dynamics. Treating it as static rarely produces the best outcome 

Inheritance Tax reform: A once-in-a-generation change

By understanding how the allowances fit together and by revisiting plans as circumstances and rules change, families can make more informed decisions and ensure that wealth is passed on intentionally, rather than shaped by default.

Inheritance tax is a layered system, not a single rate

 – The final tax bill depends on how allowances, gifts and thresholds are applied together.

The £325,000 nil rate band can be eroded

 – Gifts made in the seven years before death reduce how much tax-free allowance remains.

The residence nil rate band comes with strict limits

 – Passing a home to direct descendants and staying below £2 million is key to retaining it.

Some non-taxable assets still affect allowances

 – Assets outside the estate can still reduce the residence nil rate band through the £2 million test.

Common gifting allowances are often missed

 – Annual exemptions, surplus income gifts and charitable giving can all reduce inheritance tax if used correctly.

Inheritance tax planning works best holistically

 – Coordinating income tax, pensions and intergenerational planning often improves outcomes.

Inheritance Tax: Understanding the Allowances That Shape Family Outcomes

 has sat at the heart of family wealth in Britain. A main residence passed down through generations. A holiday home that becomes part of family identity. 

 portfolios that once delivered dependable income alongside capital growth.

Yet today, the question many families are quietly asking is no longer 

what do we do with what we already own, and how do we pass it on without storing up problems for the next generation?

 has moved sharply up the agenda, driven by legislative uncertainty, rising 

 complexity, and a growing awareness that property wealth is fundamentally illiquid. As 

 assets to the next generation is so personal, everyone has different family dynamics”

The Family Home Is Only the Starting Point

The UK system provides specific reliefs that can allow a main residence to be passed on more efficiently, but modern families rarely own just one property. Holiday homes, buy-to-lets, and overseas properties are now common, each bringing its own planning challenges 

It is tempting to focus immediately on tax, when to gift, how to use allowances, or how to minimise inheritance tax exposure. But tax alone rarely produces good outcomes. As Rosie puts it, 

“you shouldn’t let tax be the main driver of your decisions”

The harder questions are practical. Who inherits what? Can the next generation afford to run the asset? What happens when siblings inherit jointly? And what burden might this create for the generation after them?

A holiday home cherished by one generation can quickly become a financial strain for the next once maintenance costs, council tax surcharges, and differing lifestyles are factored in 

Why am I paying a council tax premium on my second home?

Illiquidity: Property’s Structural Challenge

Property’s defining feature, its physical permanence, is also its weakness in inheritance planning. Unlike a portfolio, it cannot be divided, rebalanced, or partially sold without consequence 

Inheritance tax: Wills and inheritance tax

This matters when tax liabilities arise. Inheritance or 

 may be due at precisely the moment when cash is hardest to access. As Rosie succinctly notes, 

“how are you going to pay for that tax exposure in an asset that’s not 

Where property is held overseas, the complexity deepens. Different legal systems, succession rules, and forced heirship regimes can override intentions entirely unless carefully planned for. In these cases, wills are not an administrative detail but a central part of preserving family intent.

For landlords, the economics of buy-to-let have changed materially. Restrictions on mortgage interest relief, higher effective tax rates, and increased regulation have reduced net returns and pushed many owners into higher tax brackets.

Within families, ownership can sometimes be restructured to improve efficiency, but such moves are rarely simple. Gifting assets may remove income the original owner still needs, while debt-backed properties raise questions about affordability and mortgage eligibility for the next generation 

UK’s largest estates pay an average of £9mn in inheritance tax

, bring their own costs. Setup fees, reporting obligations, and ongoing administration all erode returns. As Rosie highlights, these structures only work when families focus on after-tax, after-cost outcomes, not theoretical efficiency .

It is against this backdrop that many long-standing landlords begin to reassess. Not because property has suddenly failed, but because alternatives now offer greater flexibility 

London landlords leave the market in increasing numbers

Selling property and reinvesting into a diversified portfolio allows wealth to be split cleanly, tailored individually, and adjusted over time. Beneficiaries are not forced into joint ownership or shared decision-making. 

, values, and time horizons can be personalised.

This does not imply that property no longer has a role. Historically, combining property with financial assets provided diversification and resilience. But the balance has shifted, and families are increasingly weighing complexity against flexibility.

What emerges most clearly is that there is no universal answer. Property is not “dead”, nor are portfolios a panacea. The real risk lies in not planning at all.

Effective inheritance planning today requires more than tax calculations. It demands cash-flow modelling, clear structuring, and honest conversations about family dynamics and expectations. It also requires clarity about what wealth is meant to achieve, income, security, flexibility, or opportunity 

Who gives wealth transfers to whom and when? Patterns in the giving and receiving of lifetime gifts and loans

As Rosie concludes, the work lies not just in choosing assets, but in 

“lots of financial planning, cash-flow modelling, tax strategies, and then importantly, what are you going to do with that money?”

For families willing to engage with that process, the future remains far from bleak. With thoughtful planning and a clear understanding of trade-offs, inheritance becomes less about preserving assets, and more about preserving options.

Property inheritance is more complex than before 

- Legislative change and evolving family structures mean UK property inheritance planning now requires proactive, long-term financial planning.

Tax efficiency should not be the sole driver 

- Successful inheritance planning balances inheritance tax, capital gains tax, liquidity, and family dynamics to avoid poor long-term outcomes.

- Property inheritance can create tax liabilities without available cash, making liquidity planning essential for buy-to-let and holiday property owners.

Buy-to-let inheritance needs reassessment 

- Higher taxes and reduced reliefs have lowered after-tax returns, leading many landlords to review their property exit and inheritance strategy.

Investment portfolios increase flexibility 

- Selling property and reinvesting can simplify wealth transfer, reduce shared ownership issues, and support individual post-inheritance investment strategies.

- Property is not “dead,” nor are portfolios a cure - all. Structured inheritance planning is essential to protect and transfer family wealth effectively.

Inheritance Planning for Property Owners

 has long been the cornerstone of private wealth in Britain. For years, it provided reliable income, steady capital growth, and the reassurance of tangible ownership. Yet over the past decade, that confidence has been tested: successive 

 reforms, rising borrowing costs, and tightening regulation have reshaped the landscape for landlords, while diversified portfolios have quietly compounded returns often with less cost and complexity. That leaves landlords wondering: 

is it worth still having a property to let?

, who outlines how buy-to-let investing has changed, the assumptions investors need to revisit, and how diversified portfolios can help support long-term resilience.

A Landscape That Has Fundamentally Changed

A decade ago, buy-to-let operated in conditions that made returns relatively forgiving. Borrowing costs were low, tax treatment was more generous, and regulation lighter. Those tailwinds have now largely reversed. Higher 

 alone have transformed the economics of leveraged property, narrowing margins and increasing sensitivity to even small changes in costs or void periods 

UK landlords quit sector as number of homes to let falls, survey says

As Rosie Bullard explains, “the tax environment has changed significantly against landlords, 

 is higher than it used to be, income tax on rental earnings has increased, and the ability to offset mortgage interest has been materially reduced.” The consequence is that property assets now need to work far harder simply to deliver an acceptable after-tax return.

By contrast, looking back over the ten years to 31 December 2025, world equity markets, as captured by the MSCI ACWI, have produced strong annualised returns of 12.75% per year 

MSCI ACWI Index (GBP)

Regulation, Risk and the Reality of Ownership

Alongside tax changes, regulation has altered the practical reality of being a landlord. Compliance requirements are more demanding, tenant protections stronger, and the process of regaining possession slower and more uncertain. For many investors, buy-to-let now resembles an operating business rather than a passive investment 

Can you still make money from UK property?

Recent policy changes are reinforcing these pressures, “a lot of regulation is now in favour of renters rather than landlords,” Rosie notes. The Renters’ Rights Bill introduces further reforms, including the abolition of Section 21 “no-fault” evictions and stricter property standards. Early indications suggest the changes could further reduce rental supply, particularly among smaller landlords. In a national survey of 1,500 landlords, 25% said they plan to sell at least one property in the next 12 months, with 49% citing new legislation and 32% pointing to higher taxes as the primary drivers 

. Rather than a short-term reaction to market conditions, this points to a structural reassessment of buy-to-let economics.

Is Buy-To-Let Still Worth It?

Investment portfolios, by contrast, operate within a highly regulated framework but without personal compliance, tenancy, or property maintenance obligations.

Despite these changes, many investors continue to assess buy-to-let using assumptions formed in earlier decades. The belief that property will reliably deliver both rental income and capital appreciation remains deeply ingrained, particularly among those who benefited from long periods of rising house prices 

UK house prices rise less than expected in 2025 as growth slows

“There’s often an assumption that property will always deliver capital growth alongside rental income,” Rosie says. “Historically that has been true in many periods, but we’re now in a very different interest rate and 

 environment.” Rental income may still feel predictable over the short term, but capital appreciation is far less certain once borrowing costs, taxation and maintenance are taken into account.

How Diversified Portfolios Take a Different Approach

Diversified investment portfolios address these challenges from a different starting point. Rather than relying on a single asset or income stream, portfolios draw returns from multiple sources across asset classes, regions and economic drivers. This diversification reduces dependence on any one outcome and allows portfolios to adapt as conditions change 

Diversifying Your Portfolio

In Rosie’s view, the distinction is not that portfolios eliminate 

, but that they distribute it more effectively. “In many respects, portfolios and property are similar, you still have capital growth and income as the two components of total return.” The difference lies in how those components are generated and how much control investors have over their structure.

Liquidity is one of the clearest points of contrast between property and portfolios. Property transactions are slow, costly and highly dependent on market conditions at the time of sale. Portfolios, by contrast, can usually be adjusted or partially liquidated within days, providing flexibility when circumstances change 

Global Private Markets Report 2025: Braced for shifting weather

“If you want flexibility within your asset base, property can be challenging,” Rosie explains. “You can’t sell part of a property portfolio easily, whereas an investment portfolio can often be liquidated quickly.” For investors approaching retirement, planning major expenditures or managing changing family needs, this flexibility can be a decisive advantage.

Visibility also plays an important role. Property values often feel stable because they are not reassessed daily, but that stability can mask underlying risk. Portfolio valuations fluctuate more frequently, which some investors find uncomfortable, but that transparency supports clearer planning and more informed decision-making.

Tax treatment further differentiates the two approaches. Rental income is taxed as income, often at higher marginal rates, and can push landlords into less favourable tax bands. Portfolio returns, by contrast, are frequently driven by capital growth, which is taxed more favourably and can be managed strategically over time.

Portfolios also allow access to tax-efficient wrappers that are simply unavailable to property investors. As Rosie puts it, “

 are an extremely efficient way to save and invest, and you simply can’t wrap a property into an ISA.” Over the long term, this difference can materially affect net returns and overall financial resilience.

None of this means property no longer has a role in long-term wealth planning. For some investors, its tangibility and familiarity remain valuable, and property can still play a part alongside other assets. The more important question is whether buy-to-let continues to justify its complexity, cost and risk within a modern portfolio.

As Rosie concludes, the key is perspective: understanding after-tax returns, liquidity, time commitment and how each asset contributes to resilience across an entire financial plan. For many landlords, revisiting long-held assumptions may be the most important step in deciding what role property should play going forward.

The buy-to-let landscape has fundamentally changed

 – Higher taxes, rising interest rates and tighter regulation have reduced margins and increased risk for landlords.

Buy-to-let now requires far more active involvement

 — Increased compliance requirements and strengthened tenant protections mean property ownership demands significantly more time, oversight and management.

Old assumptions about property returns may no longer hold

 – Rental income may feel stable, but capital growth is less certain once costs and tax are fully considered.

Diversification reduces reliance on a single outcome

 – Investment portfolios spread risk across assets, regions and income sources rather than depending on one property.

 – Portfolios can usually be adjusted or sold quickly, while property can be slow, costly and inflexible to exit.

 – Capital growth and access to ISAs can improve long-term after-tax outcomes compared with rental income taxed at marginal rates.

Buy-to-Let or Diversified Portfolios? Rethinking the Foundations of Long-Term Wealth

Managing director at Compare Wealth Managers.

Rory Scott

Bio

Articles from author

Inheritance Tax: Understanding the Allowances That Shape Family Outcomes

Inheritance Planning for Property Owners

Buy-to-Let or Diversified Portfolios? Rethinking the Foundations of Long-Term Wealth

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Financial well-being

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Rory Scott

Bio

Articles from author

Inheritance Tax: Understanding the Allowances That Shape Family Outcomes

Inheritance Planning for Property Owners

Buy-to-Let or Diversified Portfolios? Rethinking the Foundations of Long-Term Wealth

Start your journey to your Financial well-being

FIND OUT MORE

LEGAL

CONTACT US

Start your journey to your
Financial well-being