IHT on Second Homes and Buy-to-Let Properties: Case Study

How property investors can plan for inheritance tax on buy-to-let portfolios and second homes.

Case StudyLast updated: February 2026Reading time: 12 min

Note: This is a hypothetical scenario created for educational purposes only. The names, situations, and outcomes are fictional examples designed to illustrate IHT planning concepts. Always consult with FCA-regulated financial advisers and qualified tax professionals for advice specific to your circumstances.

The Situation

Robert and Jane (both 68) built a property portfolio over 30 years. Their estate includes:

  • Main residence: £500,000 (no mortgage)
  • Buy-to-let property 1: £350,000 (mortgage: £100,000)
  • Buy-to-let property 2: £300,000 (no mortgage)
  • Holiday home in Cornwall: £400,000 (no mortgage)
  • Savings and investments: £200,000
  • Pensions: £150,000

Total gross estate: £1,900,000
Debts: £100,000
Net estate: £1,800,000

Initial Calculation

The IHT Problem

Initial calculation (assuming both die today):

  • Combined nil-rate bands: £650,000
  • Combined RNRB: £350,000 (only applies to main residence)
  • Total allowances: £1,000,000
  • Taxable estate: £800,000
  • IHT due: £320,000

Key issue: Additional properties don't qualify for RNRB, significantly increasing the tax bill.

Planning Options Considered

  1. Selling properties and spending/gifting proceeds
    • Pro: Reduces estate quickly
    • Con: Lose rental income, CGT on sales
  2. Gifting properties to children
    • Pro: Outside estate if survive 7 years
    • Con: CGT on gift, lose control, stamp duty for recipients
  3. Setting up a company structure
    • Pro: Can be more tax efficient
    • Con: Complex, costs to restructure
  4. Strategic partial solutions
    • Combination of smaller steps

Strategy Implemented

Robert and Jane chose a multi-pronged approach:

  1. Sold the holiday home: Reduced estate by £400,000, paid CGT of £40,000
  2. Used proceeds to:
    • Gift £50,000 to children (using 7-year rule)
    • Max out pension contributions (£100,000)
    • Keep £250,000 in savings for living expenses
  3. Life insurance: Took out £300,000 life insurance in trust to cover remaining IHT
  4. Will planning: Left buy-to-let properties to children with mortgage offset provisions
  5. Ongoing gifting: Annual gifts of £6,000 combined (£3,000 each)
After Planning

Revised IHT Position

After planning:

  • Reduced estate: £1,350,000 (down from £1,800,000)
  • Total allowances: £1,000,000
  • Taxable estate: £350,000
  • IHT due: £140,000
  • Tax reduced from £320,000 to £140,000
  • Life insurance in trust covers the £140,000 IHT bill

Key Lessons

  • Second homes and buy-to-let properties significantly increase IHT exposure
  • RNRB only applies to main residence left to direct descendants
  • Sometimes selling assets and using proceeds strategically is the best option
  • Life insurance in trust can cover IHT without increasing the estate
  • Balance estate planning with lifestyle needs and income requirements
  • Consider the costs of restructuring vs potential savings

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