In recent years there has been an explosion of investment activity in UK property, particularly in the buy-to-let market. It is truly amazing to observe how even the most unlikely people have invested in bricks and mortar through the easier availability of mortgage finance. Professionals, office workers, retailers, traders, businessmen and even students find themselves on the property investment ladder. Nowadays no self-respecting business entrepreneur can afford to have an investment portfolio excluding property assets.

Much of the activity has been led by Asian entrepreneurs and families, who now find themselves with substantial property portfolios and high net worth.

As a tax adviser I have seen this explosion first hand and observed some of the consequences in providing solutions for family and personal tax planning. Property investment is a long-term investment that will most probably be passed from generation to generation. However in many instances we find investors do not consider the tax consequences of their current portfolios in the rush to manage rentals and further grow the portfolio.

An area often ignored is Inheritance Tax, a tax that has crept up unseen in the past few years. It can be substantial - tax is charged at 40% on the estate value above £263,000 from 6th April 2004. In many parts of the United Kingdom the total value of the home, plus assets such as cash, investments, famil business and goods is easily much more than this and so the potential tax can be huge - for instance an estate of about £1,500,000 can easily clock up a tax bill of £500,000. Yes - a bill of half-a million for an estate of £1.5 million.

In West London a reasonable personal residence plus one buy-to-let property can easily reach such a figure. A detached property can easily be over a £1,000,000 in Ealing or Richmond. Even in other parts of the country, such as the West Midlands, an investor with seven average buy-to-let properties can reach such a portfolio. Faced with such values, despite the recent tightening of tax avoidance schemes, investors can be comforted to know that there are still planning opportunities available through good value tax advice.

In the past a possible solution was to dispose valuable assets, principally the main residence, albeit retaining its use, in order to remove them from the estate. This has created large tax savings - but from April 2005 this is being stopped as such a disposal will then have to pay income tax on the market rent, if the asset is property or an assumed interest if some other asset.

However, there are still other alternatives if you plan ahead through the use of trusts and gifts.

It is important to remember that individual tax payers have their own "nil rate band" (the initial amount that does not incur tax) for Inheritance Tax and if they are wise they can arrange their tax affairs to use them.

Married couples often, naturally, leave assets to each other in the event of death. No tax is payable on the death of the first spouse, but this leaves you open for a much bigger tax bill when the remaining spouse dies as they have only one nil rate band to use and they have lost the use of the nil rate for the first spouse. The numbers are clear - an extra £263,000 becomes taxable and the estate can lose £105,200 (at 40%) to tax. Good professional advice can avoid this and other potential tax.

For instance a careful use of Trusts can help in saving tax. Many mortgages have life policies which are taken to pay for the outstanding loans but they need not be tied in to the property loan. The proceeds paid on a life policy often add to the value of the estate - so it may be more sensible to put the policy into a trust, a separate entity. This has a triple benefit: tax is avoided; loans can be paid from the estate and be tax-deductible; and proceeds being available much faster for the remaining family.

An additional planning opportunity is to purchase a term life policy equal to the average expected tax liability and place the policy into a trust to enable the IHT debt to be cleared from the estate.

If large amounts of free surplus money and other liquid assets are expected it may make sense to remove it from the future estate by gifting to individuals or trusts. For instance capital may be invested in an investment bond held through a trust, with the trust paying income from the capital. With use of a suitably approved scheme the arrangement can reduce the potential tax liability totally after seven years and additionally remove any growth in capital in that period out of the final estate. Gifts of up to £3,000 per year are treated as potentially exempt transfers and are removed from the tax calculation after seven years.

At the end of the day any solution must bear in mind the personal and emotional circumstances of the investors concerned. Clearly, there is no point in gifting away your inheritance if it means that the quality of life is affected or there is a risk to the capital. Anyone seriously considering future tax planning is advised to seek sound strategic options and level-headed advice from a proven professionals, particularly a regulated, properly qualified accountant or independent financial adviser (IFA).

ABOUT ATUL SHARMA

Atul Sharma is a Director of The GKP Partnership (a division of CPL Audit), a professional accountancy and tax practice based in central and west London. http://www.gkpp.com email atul@GKPP.com

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