Reading Time | 3 mins

Navigating the Inheritance Tax trap for buy-to-let landlords

Share this article

An often-overlooked issue for landlords owning rental properties, either personally or as a company, is the potential Inheritance Tax (‘IHT’) charge on the value of their buy-to-let investments arising on death.

Buy-to-let properties, or the shares of a company that holds them, will form part of your estate when you die, and you’ll be liable for Inheritance Tax at 40% on any value above the IHT ‘nil rate band’ of £325,000. Given that the value of other assets would also be taken into account when valuing an estate upon death, many landlords may well be exposed to a significant and often unexpected IHT bill.

Selling properties

For individual landlords, one option could be to sell these properties before you die to reduce your IHT liability. You will, however, be required to pay Capital Gains Tax (‘CGT’) if the value of the property has increased since you purchased it.

CGT on the gains made on residential investment property will generally be charged at 28% on any gain made over £6,000 (falling to £3,000 from 6 April 2024).

Also, you will still have to pay IHT on the cash from the sale of properties, which now forms part of your estate instead, unless you can spend it all before you pass away or reinvest it into new assets qualifying for some form of IHT relief.

Gifting assets

If the properties have increased in price since you bought them, you may suffer with a CGT bill even if you gifted them to your heirs for nothing.  In this instance, you’d pay CGT on the difference between the price when you bought the property and the market value when you gave it away, although it is possible to gift a property to a spouse without crystallising CGT, which can in some circumstances offer planning opportunities.

For IHT purposes, gifting the properties or the cash obtained from selling them to anyone other than a spouse will however require you to live for seven years after the date of the gift in order for this to be exempt from IHT.

If you live for less than seven years after the gift, the recipient of the gift will be charged Inheritance Tax on the assets on a sliding scale depending on how long you lived after making the gift.

If you own the properties jointly, the value of the gift is split between yourself and your partner and each considered separately for IHT purposes. So you would both have to live for at least seven years after making the gift for it to be classed as a potentially exempt transfer. If one of you died within seven years, Inheritance Tax would be charged on the same sliding scale on their half of the gift to your beneficiaries.

Improving the IHT position for buy-to-let landlords

In many cases the key planning point is likely to be taking decisions sufficiently early, such that you can explore whether to remain invested in a buy-to-let portfolio, or dispose of it, either by passing this on to your heirs during your lifetime or through a sale such that proceeds can be either gifted or reinvested in other more IHT efficient assets.

The use of more sophisticated property holding structures, such as family investment companies, can in some circumstances be useful, allowing landlords to make lifetime gifts to their heirs or into trust, while preserving their control over the portfolio.

Care is however needed with such planning as the introduction of such structures will often require consideration of a wide range of potential tax issues, including not only CGT and IHT but also Stamp Duty Land Tax and, in some circumstances, Income Tax.

The savvy buy-to-let landlord would therefore be wise to take advice at an early stage to firstly understand what their IHT exposure may be, and secondly to understand the range of alternative planning opportunities available to allow them to improve their position.

To find out more or discuss your individual tax needs, please contact a member of the Tax team on 0333 123 7171.