When considering passing a buy-to-let property to your child, the goal is often to do so in a tax-efficient way.
Gifting property can seem straightforward but carries significant tax implications, particularly when it comes to inheritance tax (IHT) and capital gains tax (CGT).
(Read Time: Approx. 4 minutes)
Topics Discussed:
- Tax implications of gifting a buy-to-let property
- The benefits and drawbacks of lifetime gifts versus inheritance
Options for Gifting a Buy-to-Let Property
Lifetime Gifts: A Chance to Save on Inheritance Tax
Gifting a property during your lifetime can be an effective strategy for reducing your IHT liability, provided you survive for seven years after making the gift.
Under the “seven-year rule,” if you survive the full seven years, the gift falls outside of your estate for IHT purposes.
However, if you pass away within this period, the property’s value may still be subject to IHT, though taper relief might reduce the amount payable.
Keep in mind that capital gains tax (CGT) is a crucial factor here.
If the property has increased in value since you purchased it, you may be liable for CGT on the gain.
The tax is calculated on the difference between the property’s original purchase price and its market value at the time of the gift.
The CGT rate can be as high as 28% on residential properties, so it’s essential to calculate this in advance to avoid surprises.
Stamp Duty Land Tax (SDLT) may also apply if the property has an outstanding mortgage, as transferring the property can be considered a transaction subject to SDLT.
Gifting Through Your Will: Avoiding CGT But Facing IHT
If you choose to pass the property to your child in your will, this avoids CGT altogether, as the value of the property resets to its market value at the time of your death.
However, IHT is still a significant consideration. Any part of your estate that exceeds the £325,000 nil-rate band may be taxed at 40%.
If the total value of your estate—including your home—exceeds £2 million, the residential nil-rate band may also be tapered, reducing the amount you can pass tax-free.
One benefit of this approach is that your child will inherit the property without the immediate burden of CGT.
They can sell the property with the value reset to the market rate at the time of your death, potentially reducing their future CGT liability.
Transferring to a Company: Added Complexity and Costs
Another option is transferring the buy-to-let property to a company, which would then be owned by your child.
However, this option is fraught with tax complications, including CGT and SDLT liabilities.
Moreover, your child would need to manage the company, which comes with its own obligations, such as filing annual accounts and handling corporation tax.
In some cases, this approach may result in an IHT charge if not structured correctly, and the transaction could also trigger significant SDLT costs.
The complexity of this option usually requires specialist tax advice to ensure it’s worth considering.
Alternative Strategy: Trusts for Flexibility and Asset Protection
If none of the above options suit your circumstances, establishing a trust could provide a viable alternative.
Trusts allow for more flexibility in the transfer of property and income, and they may offer better asset protection.
However, trusts also come with their own set of IHT and CGT implications, and there may be lifetime IHT charges if the property’s value exceeds the nil-rate band.
Trusts are particularly useful if you want to retain some control over the asset while still making an effective IHT plan.
You can defer the CGT liability and potentially benefit from better protection against creditors.
Summary
When it comes to gifting a buy-to-let property to your child, there’s no one-size-fits-all solution.
Whether you choose to gift during your lifetime or through your will, each option has distinct tax implications.
Gifting now may reduce your IHT bill, but CGT and SDLT must be considered.
Passing the property through your will avoids CGT but could lead to a significant IHT burden.
Whichever route you choose, specialist advice is essential.
At Tax Expert, we’re here to help you navigate the complexities of property gifting, ensuring you make the most tax-efficient decision for both you and your family.
Fill out our form here for any questions, give us a call at 01772 788200, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel