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Buy-to-let properties and Inheritance tax – where do you stand?

Amy Peters
04 November 2021 17 min read

We are often asked how Inheritance Tax rules apply for those that own buy-to-let properties. Typically, inheritance tax is payable on buy-to-let properties as they will form part of your estate when you die.

Inheritance tax is charged by HMRC at a rate of 40% on any value above a single person’s nil rate band allowance of £325,000 therefore your overall tax liability could be large when you also include your other assets.

How can I reduce inheritance tax on buy-to-let properties?

You may consider selling these some or all of these properties before you die to reduce your IHT bill. However, keep in mind that if the value of the property has increased since your purchase it, Capital Gains Tax (CGT) may be payable.

Capital gains tax on residential property is either 18% or 28% depending on whether you are a standard rate or higher rate tax payer on any gain made over £12,300 (2021-2022).

But do keep in mind, you will still have to pay IHT on the case from the sale which now forms part of your estate unless you spend it all before you die.

If you already have a Will and are not sure how this affects it, read this article on how to update your Will.

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Gifting Assets

Even if you choose to gift property to your beneficiaries during lifetime for nothing, you’ll still incur a potentially hefty CGT bill. This would be based on the price when you bought the property and the market value when you gave it away.

In addition, when it comes to gifting the property or cash realised from selling the property, IHT rules require you to live for 7 years after the date of the gift for the gift to be exempt from IHT. If you live for less then 7 years, the recipient of the gift will be charged inheritance tax on the asset. This will be based on a sliding scale depending on how long you lived after making the gift.

For property that is owned jointly, the value of the gift is split between yourself and the co-owner (usually your partner or spouse) and each considered separately for inheritance tax purposes. Therefore, you would both have to live for at least 7 years after making the gift for it to be considered as a potentially exempt transfer.

Do be cautious if you’re thinking of selling properties to your beneficiaries for less than the market value. This is considered a gift by HMRC and the value in this instance is the difference between the market price and what you sold the asset for.

Inheritance tax on property purchased through a limited company

Buying a property through a limited company may seem to an option to manage IHT on you property portfolio when you die. However, it’s worth keeping in mind that you can’t simply transfer existing assets into a new limited company setup and reduce inheritance tax that way as this is classed as a ‘disposal’ and would be chargeable under capital gains which may diminish any inheritance tax savings.

Often people raise the question of business property relief (BPR) in relation to inheritance tax as this does exempt a ‘business or an interest in a business’ from inheritance tax and therefore passing on a share of a limited company can be inheritance tax free depending on the nature of the business assets.

However, BPR cannot be claimed in the company ‘mainly or wholly deals with securities, stocks or shares, land or buildings in making or holding investments’. Essentially this means that a company that just holds property and collects rent cannot claim business property relief.

What is the next step? 

Tax, it’s a complicated area that’s for sure and if you’d like to discuss your situation further, contact us and we’d be happy to help.

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