Landlords and legacy: pass on your property, not a large inheritance tax bill

You’ve put your heart, soul and money into buy-to-let property. What’s the best way to pass that legacy on – and not leave a large Inheritance Tax bill as a parting gift? 

Landlords face a choice: sell a property, keep a property as part of your estate, or gift a property to your children.

When you’re thinking about how to pass your money or property on tax-efficiently, you have two big taxes to consider: IHT and CGT. 

• If you sell a property, you’ll be paying Capital Gains Tax (CGT) if it’s increased in value. 
• If you keep it and pass it on to your children, it’ll form part of your estate and may mean a higher Inheritance Tax (IHT) bill. 
• Or, if you decide to gift the property while you’re still alive, you may still need to pay CGT, and you might have to give up the rental income.

Sidestep one tax, and you may end up paying more of the other. Between Capital Gains Tax and Inheritance Tax, being a buy-to-let landlord can feel like playing a game of snakes and property ladders.

Keeping a property

If you die owning property, your beneficiaries won’t pay Capital Gains Tax when they inherit it, but it will be counted as part of your estate, as far as IHT is concerned. IHT is charged at 40%, so if you die owning a property that is worth £400,000, your beneficiaries might have to give back £160,000 to the tax man. 

The overall value of your estate is what you pay IHT on, but you can write off some of the value up front. Everybody is entitled to the nil-rate-band (NRB) allowance of £325,000, which you don’t pay tax on. If you leave everything to your partner when you die, that nil-rate-band will be doubled to £650,000 tax free when that person dies.

If you only have one or two buy-to-let properties, and a few other assets, keeping the property may be a win.

Selling a property

If you sell a property that you have never lived in, it will be liable for CGT if it’s now worth more than you bought it for. CGT is a tax on the gain, or the profit, you’ve made. For residential property, CGT is charged at 18% if you’re a basic rate taxpayer, or 28% if you’re in the higher band.

Gifting a property

Many landlords think about gifting property, in their lifetime, to reduce the size of their estate for IHT purposes. 

If you don’t need the rental income from the property, you could consider an outright gift. This is called a Potentially Exempt Transfer or PET (note the ‘potentially’). As long as you don’t die within seven years, there will be no IHT to pay. But once you’ve given the house away, that’s it. You have no control, there’s no flexibility, and no going back.  

Gifting a property counts as disposing of an asset, which will mean you need to pay CGT if the property has gone up in value. 

The value of financial advice and IHT planning

If you’re drawing income from your rental properties, or plan to when you retire, your IHT planning becomes a bit more complicated. You can give away the whole property – either to your children, or into a Trust – but keep taking an income; or you can give away just a share of the property into a special type of Trust – and keep the right to take an income. Careful planning with a qualified financial adviser and an experienced solicitor can help you make the most of your assets. 

IHT is a highly complex area. As a landlord, your IHT liability will change each time you buy or sell a property. It’s always good idea to get in touch with a financial adviser when you’re thinking about IHT. They can help make sure the choices you make will be tax-efficient for you – and those you leave behind. 

Speak to an expert adviser today.
 

The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.Trusts are not regulated by the Financial Conduct Authority or the Prudential Regulation Authority.