Buy-to-let inheritance tax: where do you stand?

If you own buy-to-let property in England and Wales, it will normally form part of your estate for Inheritance Tax (IHT) purposes. That can push your estate over the nil rate band and create a significant IHT bill for the people you leave behind. This article explains the main issues, practical options you can consider, and where to get specialist support.

How buy-to-let is taxed on death

When you die, HMRC looks at the value of everything you own, including buy-to-let properties, bank accounts, investments and personal possessions. The current nil rate band for IHT is £325,000. Anything above that may be taxed at 40% unless other reliefs apply. There is also a residence nil rate band which can apply when you pass a main home to direct descendants, but this usually does not help with pure buy-to-let investments.

Capital Gains Tax and selling property before you die

Selling a buy-to-let property during your lifetime will remove that asset from your estate, but you will usually face Capital Gains Tax (CGT) on any increase in value since purchase. For residential property, CGT rates have historically been 18% or 28% depending on your overall income tax band. You should check the current rates and allowances on GOV.UK before acting: HMRC - Inheritance Tax.

Example

If a property bought for £120,000 is now worth £300,000, selling triggers a taxable gain of £180,000 less any allowable costs and reliefs. Paying the CGT removes the property from your estate, but the cash proceeds then count as part of your estate unless spent or gifted in a way that survives IHT rules.

Gifting property while you are alive

You can gift property to beneficiaries, but gifts are treated as potentially exempt transfers (PETs). To be fully exempt from IHT, you must survive seven years after making the gift. If you die within seven years the gift may still be taxable, applying taper relief for gifts made between three and seven years before death. Also, gifting a property is treated as a disposal for CGT, with the gain calculated using the market value at the point of transfer.

Gifts to a spouse or civil partner

Gifts between spouses and civil partners who are domiciled in the UK are generally exempt from IHT, but jointly owned properties need careful treatment when ownership shares change.

Using a limited company or business relief

Some people consider buying or transferring property into a limited company to separate the asset from their personal estate. Transferring existing property into a company is treated as a disposal for CGT, which can create an immediate taxable gain and erode any expected IHT savings.

Business Property Relief (BPR) can exempt business assets from IHT, but BPR does not generally apply to companies that simply hold and rent property. If your company mainly deals with investments in land or buildings, BPR will not be available.

Practical next steps

• Review the value of your estate, including mortgages and loans, to see where you stand against the £325,000 nil rate band and any applicable residence nil rate band.
• Consider whether selling or gifting property makes sense, taking account of CGT, the seven-year rule and the effect on your income in retirement.
• Think about using trusts in specific cases to protect assets and control how property is passed on. Trusts have their own tax rules and must be set up correctly.
• Speak to a solicitor or tax adviser with experience in property and IHT for personalised advice.

Need help with your will or planning? If you do not yet have a valid Will, or you need to update one to reflect buy-to-let assets, we can help. See our Will writing service: /will-writing or create an Online Will: /online-will.

Thinking about trusts or LPAs? Trusts can be useful in some situations to control how property is passed on. Learn more about setting up trusts: /trusts. For peace of mind if you become unable to make decisions, consider a Lasting Power of Attorney: /lasting-power-of-attorney.

If you would like to discuss your portfolio and options in plain English, please contact us and one of our advisers will talk you through the choices that fit your family and financial situation.

Tax and wills can be complex, but with early planning you can reduce the risk of an unexpected IHT bill for your beneficiaries. We are here to help you find the right path for your buy-to-let investments.

Further reading: HMRC provides official guidance on inheritance tax and reliefs at gov.uk.