A common client question: How do 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 an estate when a person dies.

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 the overall tax liability could be large when you also include other assets.


How can the inheritance tax on buy-to-let properties be reduced?

A person may consider selling some or all of their properties before they die to reduce the IHT bill. However, keep in mind that if the value of the property has increased since purchased, Capital Gains Tax (CGT) may be payable.

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

But do keep in mind, there will still be IHT payable on the case from the sale which now forms part of the estate unless it is spent before a person dies.


Gifting Assets

Even if a person chooses to gift property to beneficiaries during a lifetime for nothing, a potentially hefty CGT bill may still be incurred. This would be based on the price when the property was bought and the market value when it was given away.

In addition, when it comes to gifting the property or cash realized from selling the property, IHT rules require a person to live for 7 years after the date of the gift for the gift to be exempt from IHT. If the person lives for less than 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 the person has lived after making the gift.

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

Advise client’s to be cautious if they’re thinking of selling properties to their 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 the asset was sold for.


Inheritance tax on property purchased through a limited company

Buying a property through a limited company may seem to be an option to manage IHT on a property portfolio when a person dies. However it’s worth keeping in mind that someone cannot 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.


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. We have tax experts on hand who deal with the most complex cases and can offer trusted advice.