£2.5 million in property equity, yet £30,000 a year short of living costs
This is a case study of a 72-year-old landlord who had built substantial wealth, but was using his savings to pay for everyday life and could not afford the inheritance tax planning he wanted. A conversation with his children added another reason to reconsider his property portfolio.
I want to share a real client story because I suspect quite a few landlords will recognise something of themselves in it. I will keep his identity confidential, but the circumstances are worth explaining.
He first came to Property118 after reading an article about an investment outside property on which I was receiving a 10% fixed return. He had £300,000 in the bank, so he contacted the people who had arranged the investment for me, obtained the information and went away to consider it. He did not proceed.
Some time later, he read another of our articles, this time asking the question “Could your family afford to keep your property portfolio after you die?” This resulted in him obtaining a quotation for Whole of Life insurance written into trust to provide the money to pay inheritance tax. He was just over 70, in good health, and concerned about an estimated £1.5 million inheritance tax bill. The quotation he obtained was approximately £3,000 a month, or £36,000 a year. Again, he went away to think about it.
It was only when he subsequently booked a Property118 consultation that the reasons for his hesitation became clear.
He explained that he had approximately £2.5 million of equity in his rental portfolio, after deducting the mortgages. It was producing nearly £90,000 a year before tax, but the amount he was left with after tax was only about £30,000. His living costs were £60,000 a year.
The Section 24 restrictions on finance cost relief were only part of his predicament. As many landlords know only too well, mortgage interest is no longer deducted when calculating taxable residential rental profits for affected individuals. A restricted basic-rate tax reduction takes its place, which can leave a considerable gap between the profit you actually make and the income on which tax is calculated.
That £300,000 in the bank now takes on a rather different significance. He was £30,000 a year short of what he needed to live on. In his mind, the savings would cover that shortfall for another ten years, assuming his income and spending stayed much the same. Of course, living longer, inflation or an unexpected expense could change that calculation.
You might reasonably think that a 10% return on £300,000 would produce the missing £30,000. He had considered that too. However, the return would be taxable, and he was worried about how much he would actually receive after tax. He also needed access to the capital. Committing the money he relied upon for everyday living was a very different proposition from investing spare cash.
Meanwhile, the inheritance tax concern went well beyond the rental portfolio. There was a valuable main home, a holiday home and other assets, as well as a pension fund to consider in the wider planning. Most unused pension funds and pension death benefits will come into the inheritance tax calculation for deaths from 6 April 2027, so the timing and the particular pension arrangements matter too.
He wanted to protect his children from a substantial tax bill, but the £36,000 annual insurance premium was more than the entire £30,000 he was retaining from his rental business. He was already using his savings to support himself. He felt asset-rich, cash-poor, and was beginning to feel that he had somehow failed. The Whole of Life premium was due to him being in his 70’s, and still in good health.
I can understand why he felt trapped. He had accumulated substantial wealth, yet neither of the opportunities he had investigated seemed affordable when considered against his existing income.
Our consultant drew his attention to what the £2.5 million tied up in the rental portfolio was actually producing. Nearly £90,000 before tax represented an income return on equity of approximately 3.6%. The £30,000 he retained was just 1.2%. Capital growth might add to his wealth, but it would not pay the bills unless he found a way to release it.
That opened up the possibility of selling the rental properties, even allowing for the capital gains tax. For the purposes of the discussion, suppose he was left with £1.5 million after repaying the mortgages, allowing for any discounts needed to sell, and paying the selling costs and CGT. Add the £300,000 already in the bank and he would have £1.8 million to work with.
At an illustrative 10% annual cash return, £1.8 million would produce £180,000 a year before tax. To give that some context, a UK individual receiving £180,000 solely as taxable interest, with no other income, would retain roughly £114,000 under 2026/27 tax rules, including the applicable savings starting rate. That would cover £60,000 of living costs and £36,000 of insurance premiums, with about £18,000 remaining.
Those figures explain why the possibility was worth exploring. He would need an FCA-authorised adviser to assess suitable investments and insurance, and to test whether the plan remained affordable with lower returns, fees and rising living costs.
Then there was the conversation with his children, which I think is a particularly important part of this story. They told him they did not want to inherit the rental portfolio anyway.
They considered the return diabolical given the risks their father faced and the increasing burden of legislation. They did not want to have to deal with probate involving an illiquid rental portfolio, the mortgages, or the pressure that could put them under. They much preferred the prospect of him releasing the equity and arranging his affairs so there would be money available to pay the inheritance tax.
In their minds, within a year of his death they could have the tax dealt with and be enjoying the benefit of what remained of his estate. That was their expectation, rather than a timetable anyone could guarantee. The tax itself normally falls due by the end of the sixth month after death, so the funding would need to be available earlier.
A suitable Whole of Life policy in trust could provide that money without waiting for probate, subject to the policy terms and premiums being maintained. The purpose would be to fund the bill, and the amount of cover needed would have to be reviewed after any sales. His home, holiday home and the rest of the estate would still need administering, but the children would be spared taking on a rental business they had already said they did not want.
There is still detailed work to do before an option discussed in a consultation becomes a plan someone can act upon. Actual sale proceeds, tax and suitable investments all need checking, and selling part of the portfolio or reducing borrowing may also be worth considering. The client remains the person who decides what he wants to do.
For me, the point is that a large capital gains tax bill should be weighed against what the money left afterwards could achieve. If retaining the properties means continuing to use up savings, struggling to fund family protection and ultimately leaving the children a business they do not want, the cost of selling deserves to be considered in that wider context.
He had built considerable wealth. It was entirely reasonable to look again at how that wealth could support his own life and benefit his family. I think many landlords would find that a useful conversation to have, particularly with their children.
If this sounds familiar, you can arrange a Property118 consultation to discuss your circumstances and the options to explore. It helps to start with what you need to live on, what you own, what you owe, your taxable income, and then what you want to retain and what your family would actually like to inherit.
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60 comments on this article
Learn from your peers’ experience
A different perspective could help you spot an issue, avoid a mistake or find a better way forward. Read the comments and add your own views if you wish.
Member Since January 2020 - Comments: 156
12:35 PM, 5th November 2026, About 4 days ago
One of my concerns (shouldn’t it be everyone’s?) is what will happen when there’s a digital meltdown with data getting lost or purposely hidden.
It’s not as though we haven’t had warnings.
Stock market investments are an intangible series of ones and noughts that sit on computers and rely upon the internet to be valued and traded.
In contrast, property is analogue and tangible.
Bitcoin, anyone?
Member Since January 2011 - Comments: 12298 - Articles: 1497
12:41 PM, 5th November 2026, About 4 days ago
Reply to the comment left by Mick Roberts at 05/11/2026 – 12:21
There are many more alternatives to just property and stock markets. The best wealth managers will share them all with you, but only if you’re already wealthy enough for them to be interested in talking to you.
Member Since January 2020 - Comments: 156
12:46 PM, 5th November 2026, About 4 days ago
Reply to the comment left by Mark Alexander – Founder of Property118 at 05/11/2026 – 12:41
OK, there are Corporate and Government Bonds, along with numerous options that are impossible to understand.
Member Since January 2011 - Comments: 12298 - Articles: 1497
12:50 PM, 5th November 2026, About 4 days ago
Reply to the comment left by Ian Cognito at 05/11/2026 – 12:46
And more …
Member Since January 2020 - Comments: 156
12:54 PM, 5th November 2026, About 4 days ago
Reply to the comment left by Mark Alexander – Founder of Property118 at 05/11/2026 – 12:50
I’m intrigued!
What have I missed that are not included within “impossible to understand”?
Member Since January 2011 - Comments: 12298 - Articles: 1497
12:57 PM, 5th November 2026, About 4 days ago
Reply to the comment left by Ian Cognito at 05/11/2026 – 12:54
Lots!
I wrote about one here: https://www.property118.com/from-landlord-to-lender-why-i-invested-at-10-instead-of-buying-another-rental-property/
Member Since January 2020 - Comments: 156
1:38 PM, 5th November 2026, About 4 days ago
Reply to the comment left by Mark Alexander – Founder of Property118 at 05/11/2026 – 12:57
Thanks Mark.
I know that you are smart, experienced, will not take anything at face value, and will have done extremely thorough due diligence.
I, in contrast, am somewhat out of my depth, however…
Would I be wrong to liken a loan note to a higher-risk corporate bond that cannot be traded?
As I see it, a company will pay a guaranteed 10% to borrow from a private individual for one of two reasons:
1) The company is unable to borrow at a lower rate from traditional lenders, who will have considered the risk one not worth taking.
2) The company is speculating interest-rate wise and believes that 10% will look attractive in the near future (the lending being for a term of only 3 years).
Neither gives me confidence.
That said, perhaps it is tax efficient for a company to offer loan notes rather than borrow in a more traditional way?
Member Since January 2011 - Comments: 12298 - Articles: 1497
2:31 PM, 5th November 2026, About 4 days ago
Thanks Ian. I think your comparison with a higher-risk corporate bond is fair. There’s no ready market for my loan note, so I went into it expecting to leave the money there for the full 30 months. The word I’d change is “guaranteed”. The company agreed to pay me 10% a year, quarterly. If it fails, I could lose the interest and my capital.
Why pay me 10% when a bank would charge less? In this case, the banks were already lending. The business had secured a £275 million facility from NatWest and a further £250 million from Citi. Those lenders have first call on the assets backing their facilities. My money sits further back in the queue, and I expect a higher return for taking that risk.
Take a simple example. If a lender borrows £90 at 5% and £10 at 10%, its annual interest bill is £5.50 for every £100 it lends. Those figures are illustrative, but they show why paying 10% on a small part of the funding can make commercial sense at today’s rates. The mortgage income still has to cover that bill, operating costs and losses. I wrote about the principle here: https://www.property118.com/interest-rate-arbitrage-explained/
On tax, a company can generally deduct interest on either a bank loan or a loan note, subject to the usual rules. I see no special tax advantage that would explain the 10%.
What mattered most to me was how I’d get my money back. The lender had already refinanced two mortgage portfolios through the public markets. I also knew the operating company had made a loss in 2024, so I took seriously the possibility that refinancing could be harder next time. On balance, I was comfortable putting part of my property sale proceeds into a business I understood. As I ease into retirement, quarterly income without another set of tenants or another roof to replace suits me.
Member Since June 2013 - Comments: 3422 - Articles: 83
3:28 PM, 5th November 2026, About 4 days ago
Reply to the comment left by Mark Alexander – Founder of Property118 at 05/11/2026 – 12:41
Ooh yeah I know like u understand your 10% thing, I have no idea.
And Gilts I have no idea.
I have the best Wealth manager in the UK ha ha. Well in my opinion.
Although his firm will still talk to anyone over a certain amount. And I imagine the basics are similar.
Member Since June 2013 - Comments: 3422 - Articles: 83
3:29 PM, 5th November 2026, About 4 days ago
Reply to the comment left by Mark Alexander – Founder of Property118 at 05/11/2026 – 14:31
That really explains it well now, I can see now why you feel safe in that & the company is not willy nilly borrowing loads at 10%.
Take a simple example. If a lender borrows £90 at 5% and £10 at 10%, its annual interest bill is £5.50 for every £100 it lends.