In this three-part series we will be exposing the myths on UK Inheritance Tax

Myth 3 – My property is my pension – and they’re taxed the same?

When it comes to saving money for retirement, many people state a preference for property over pensions. This is in spite of the fact that consecutive UK Governments have placed a greater tax burden on buy-to-let investors. Others are tempted to rely on their main home, either by downsizing or releasing equity.

Weighing up performance and risk

Property owners hope to enjoy capital growth and rental yields, compared to equities where capital growth and dividends are expected. Although equities are generally more volatile, the average UK house lost almost 25% of its value in 2008, whilst prime London property(often thought of as an asset that only goes up in value), is down 20% in the last five years.

Pensions, of course, are as volatile as the assets held within, anda UK registered arrangement or QROPS, can hold an almost unlimited range of collectives and direct investments, although not residential property because of its ‘taxable property’ designation. So, for those that like the idea of diversification, relying on a single asset class, (often with a single property), may be something to avoid.

Accessing cash

As of today, money purchase arrangements may allow flexi-access drawdown from the age of 55, while property is, in theory, saleable at any time. Though it is only as liquid as the ability to find a buyer, and often with significant trading costs, particularly if the 3% additional rate of stamp duty is payable for an additional property, as well as conveyancing and possibly management fees.

Easy to manage

Property can be time-consuming and requires a lot of effort and expertise, including dealing with tenants and rent, agents, finance, tax returns, maintenance and insurance. Buying and selling is costly and slow, so that if you have more than one property, it can be like running a small business. Pensions, on the other hand, are easier to manage in terms of the day-to-day complexities, and the need to be hands on.

It all comes down to money in your pocket

Pre-retirement, a pension rolls up tax free, with the exception of irrecoverable withholding tax on dividends. A pensioner normally enjoys 25% pension commencement lump sum (PCLS) of their available life-time allowance, with the remainder drawn subject to income tax. Rental income is subject to income tax and capital gains, though not the principal private residence, at 18% or 28% if disposed during lifetime.

How about UK Inheritance Tax (IHT)

Property counts towards an individual’s estate, which means it is subject to IHT if the nil rate band/residence nil rate band has been used. However, a pension can be enjoyed tax-free by beneficiaries if the pensioner dies before the age of 75. Once 75 or over, a pension isn’t usually subject to IHT, but beneficiaries pay income tax at their marginal rate.

As an alternative, investments held within an International Portfolio Bond can:

  • roll up virtually tax free
  • provide a tax-deferred withdrawal facility of up to 5%
  • be used in association with packaged IHT plans, such as loan trusts and discretionary gift trusts, although profits may be chargeable to income tax. This allows the client to benefit during their lifetime, often in their retirement, and simultaneously mitigate the amount of IHT they have to pay.

IHT continues to be a subject people need support with. Speak to your AAM financial planner or email [email protected] for help navigating this complex area.

Previously in this series, we covered:


This article is for information purposes only. The views expressed in this document are those of our sister company, Old Mutual International and are subject to change without notice.