Gifting Investment Properties: An Inheritance Tax Top Tip

Gifting investment properties might seem like an easy choice to lower your IHT, but it could be costlier than you think.

Three people sit at a table smiling, with files spread out in front of them. The image represents gifting investment properties.
Gifting Investment Properties

(3 minute read)

Today’s tip will cover:

  • Why gifting investment properties can be tax inefficient
  • How to pass on property whilst lowering Inheritance Tax

Approaches to IHT Planning

There are lots of ways to set up an Inheritance Tax (IHT) plan.

Most people have a default nil rate band of £325,000 which isn’t subject to tax. You only pay when the value of your estate (property, assets, shares, etc) is worth more than this amount.

For those over the nil-rate band, there are many ways to lower your bill.

If you’re feeling gift-y, you might gravitate to simply giving away your assets. Doing so means they fall out of your estate and won’t count towards your nil rate band.

This type of plan works better for some assets than others. Unfortunately, investment properties often fall into the ‘others’ category.

When you consider all the potential pitfalls and hidden costs, you might find that gifting investment properties isn’t the most tax efficient solution.

Buy why is this seemingly simple solution so problematic?


The Problem with Gifting Investment Properties

One of the easiest-to-spot problems is the seven-year rule.

Essentially, whenever you give away an asset, it becomes a Potentially Exempt Transfer (PET). This means it will fall out of your estate after seven years.

If you die before the seven-year mark, the asset will be counted in your estate.

There is some relief available to mitigate this, but it isn’t an ideal scenario.

Even less ideal is the impact gifting investment properties can have on your other taxes. In particular, CGT and SDLT.

Gifting property is a method of disposal. As a result, you’d be liable for CGT if the property has gained value. Similarly, if gifting the property results in your beneficiary taking on any mortgage debt, SDLT may become an issue.

There are also more practical lifestyle issues to consider.

If you want to maintain any control or benefit from the property, gifting isn’t wise. This is because, under Gift with Receipt of Benefit rules, if you maintain benefits of owning an asset it will still be counted as part of your estate.

Sometimes, gifting an asset is simply impractical if you need it for income or capital.

You may also consider your beneficiary:

  • Are they ready to manage a property and care for such a large gift?
  • Are they too young?
  • If they’re married, could the property fall 50% to their partner in the event of divorce?

The Solution to Gifting Investment Properties?

Unfortunately, there’s no simple one-size-fits-all approach to IHT planning and gifting investment properties. Tax planning necessitates a holistic view, taking into account not just how much IHT you can cut but if your tax position as a whole.

To achieve the best outcomes, a good accountant is a must-have.

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Kind regards Ilyas


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