How UK Property Investors Can Use Debt to Reduce Inheritance Tax
- Belgravia Capital
- Jun 12
- 6 min read
For many of our clients at Belgravia Capital Wealth Management, UK residential and commercial property forms the cornerstone of their family wealth.
Prime London townhouses, substantial residential portfolios, country estates, and long-held commercial property investments represent not only significant value, but also family pride and legacy.
However, the ownership of UK property brings a unique and growing challenge: inheritance tax.
Inheritance tax (IHT) is charged at a punitive 40% on UK-situated assets for UK-domiciled or deemed-domiciled individuals.
For those with significant UK property holdings, the potential tax exposure can easily exceed tens of millions of pounds.
Worse still, much of this property wealth is illiquid, meaning heirs may be forced into selling family assets simply to meet the IHT bill.
Given that well-known structures such as offshore companies and property enveloping no longer provide IHT protection for UK residential property, and given that gifting property outright often triggers capital gains tax and stamp duty land tax, many families are left wondering what tools remain available to them.
The answer is that one highly effective and perfectly legal strategy remains under-used: debt planning.
Why Debt Planning is a Powerful IHT Tool
Debt works because HMRC taxes the net value of your UK estate on death. In other words, it taxes your total assets minus your allowable liabilities.
If you own a £100 million property portfolio free of debt, the entire £100 million is exposed to IHT.
However, if you introduce £50 million of commercial debt secured against that portfolio, your taxable estate is reduced to £50 million, effectively halving your IHT liability.
This simple principle of borrowing against property to reduce your estate value is one of the few remaining ways to significantly mitigate IHT exposure on UK property.
The Principle: Debt Plus Diversification = Less Inheritance Tax
Of course, simply taking on debt and leaving the borrowed funds sitting in your personal bank account will not help. In fact, this approach risks being challenged by HMRC.
The real power of debt planning comes when it is combined with intelligent wealth diversification.
The goal is to use debt to release capital from the UK property portfolio and then move that capital into structures that are outside your personal taxable estate.
The process typically follows these steps.
First, you arrange commercial borrowing secured against your UK property.
Second, you invest the loan proceeds into assets that are either exempt from UK IHT or structured to sit outside your personal estate.
Third, you maintain the debt and service it appropriately. Finally, on death, your UK estate is taxed net of the debt, while the diversified assets remain protected for your heirs.
The result is a dramatic reduction in your family’s long-term IHT exposure and, equally importantly, a broader base of family wealth that is not solely tied to UK property.
What if You Cannot Use an Offshore Trust for IHT Protection?
In the past, many families would have combined debt planning with an offshore Excluded Property Trust (EPT).
These trusts, when set up by non-UK domiciled individuals, could permanently shelter non-UK assets from IHT. However, for clients who are already UK domiciled or deemed domiciled, this option is no longer available.
Fortunately, even if an EPT is off the table, there remain excellent alternatives for deploying the loan proceeds effectively.
Family Investment Companies (FICs)
One of the most flexible modern structures for UK families is the Family Investment Company (FIC).
In this approach, you create a UK company that is funded with the loan proceeds. The company’s share structure is carefully designed so that family members, often through trusts, hold growth shares, while you retain control through voting shares if desired.
The FIC then invests the capital globally across multiple asset classes.
The advantages are clear. Assets within the FIC are no longer part of your personal estate for IHT purposes, provided the structure is properly implemented.
You retain family control and governance through the corporate structure. And you gain the flexibility to manage and grow your family wealth beyond the UK property market.
At Belgravia Capital Wealth Management, we regularly implement FICs for property-heavy clients as part of a broader IHT planning strategy.
UK Discretionary Trusts
Another option is to settle a UK discretionary trust with the loan proceeds.
While UK trusts do not exempt assets from IHT entirely, they can be highly effective for managing future growth.
There is an initial entry charge of 20% IHT on the value transferred above the available nil rate band, and periodic 10-year charges apply thereafter.
However, by moving capital into a trust, you can ensure that future growth accrues outside your personal estate, protecting it from full exposure to IHT.
Trusts also offer excellent flexibility for family governance and succession planning.
Lifetime Gifting to Family
For clients seeking a simpler route, lifetime gifting remains a highly effective option.
You can gift the loan proceeds directly to children or grandchildren. Provided you survive seven years from the date of the gift, the value will fall entirely outside your estate.
If you die within seven years, the gift benefits from taper relief after three years, gradually reducing the IHT exposure.
Many clients combine lifetime gifting with life insurance to cover the risk of death within the seven-year window. This ensures that liquidity is available to meet any IHT liability during the transition period.
Key Risks of Debt for IHT Mitigation and How to Avoid Them
Debt planning must be implemented carefully to withstand HMRC scrutiny.
Firstly, the debt must be commercial. Artificial or circular arrangements (for example, intra-family loans with no real substance) are highly likely to be challenged.
The debt should be arranged at arm’s length, with market-rate interest, proper legal documentation, and clear repayment terms.
Secondly, the loan proceeds must not remain within your personal taxable estate. Simply holding the borrowed cash in a UK bank account in your name will not achieve the desired IHT reduction.
The funds must be moved into structures such as FICs, trusts, or gifted appropriately.
Thirdly, you must continue to service the debt appropriately, either by paying interest or through capitalisation where legally permissible and commercially justified.
Finally, you must balance tax efficiency with prudent gearing. Over-leveraging your property portfolio can introduce commercial risk.
At Belgravia Capital Wealth Management, we work with clients to model the optimal debt levels that maximise IHT efficiency while maintaining long-term financial stability.
Best Practice Principles when Debt Planning for Inheritance Tax Mitigation
When implementing debt planning, our recommended best practices include:
Using only commercial borrowing, whether from established lenders or properly structured family loans with full legal documentation.
Ensuring that loan proceeds move fully out of your personal taxable estate, whether via FICs, discretionary trusts, or gifting.
Maintaining a clear and robust audit trail for all transactions, so that the entire structure can be defended if challenged by HMRC.
Servicing the debt appropriately, with interest payments or structured capitalisation in line with commercial standards.
Combining debt planning with life insurance where appropriate, providing estate liquidity and covering risk during transition periods.
A Real-World Example of Debt and Inheritance Tax
To illustrate how this strategy works in practice, consider one of our recent clients: a UK-domiciled property investor with £150 million of London and UK commercial property, all held free of debt.
Without action, their IHT exposure on death would have been £60 million.
Working closely with the client and their legal advisers, we implemented a structured plan.
The client raised £75 million of commercial debt against their property holdings. The loan proceeds were used to capitalise a Family Investment Company, which is owned by family trusts.
The FIC now invests across a diversified global portfolio.
In addition, we arranged a £30 million whole-of-life insurance policy written in trust, funded by rental income from the property portfolio.
The result? The client’s net UK estate value is now £75 million, reducing their IHT exposure to £30 million.
The £75 million held in the FIC is outside their personal estate and can grow and compound for future generations.
Furthermore, the life insurance provides liquidity to cover the remaining IHT liability, avoiding the need for forced sales of property assets on death.
This is a robust, commercially justified, and fully legal structure that ensures long-term preservation of family wealth.
In Summary
Debt planning remains one of the most effective and under-used tools for UK property-heavy families seeking to manage their IHT exposure.
Even if offshore Excluded Property Trusts are unavailable, excellent alternatives exist - including Family Investment Companies, UK discretionary trusts, and lifetime gifting.
When combined with prudent gearing, clear governance, and appropriate life insurance, these strategies can preserve tens of millions in family wealth and provide a smooth path for intergenerational succession.
At Belgravia Capital Wealth Management, we specialise in helping UHNW families implement practical, legally robust IHT planning, always tailored to each family’s unique circumstances and values.
If you would like to explore how debt planning and modern IHT strategies can work for your property portfolio, we invite you to contact us for a confidential consultation.
You can reach us at:
02039165954
We look forward to helping you secure your family’s property legacy for generations to come.
