IHT Planning for Landlords

When selling (or ‘disposing of’) your home you do not pay Capital Gains Tax (CGT) if the following apply:

• If it was your only or main residence for the entire time you owned it
• You have not let part of it out (does not include lodgers)
• You have not used part of your home exclusively for business purposes (does not include using a room as an occasional office)
• The grounds, including all buildings, are less than 5,000 m2 in total
• You did not buy the property just it to flip and make a profit

This applies to houses, flats and houseboats. If seeking to gift your family home during your lifetime, private residence relief may reduce or eliminate any capital gains tax arising. The availability and extent of relief will depend on the period of occupation, any periods of non-qualifying use, and the individual’s wider circumstances.

For inheritance tax purposes, a lifetime gift will generally be treated as a potentially exempt transfer. If the donor survives seven years from the date of the gift, the value of that gift may fall outside of their estate. However, the position will depend on the specific facts, including whether any benefit is retained, and professional advice should be taken before proceeding.

Lifetime gifting of rental properties

Lifetime gifting can also apply to rental properties as potentially exempt transfers. If the donor survives seven years from the date of the gift, the value may fall outside of their estate for inheritance tax purposes.

However Private Residence Relief does not apply to rental properties and gifting them will typically be treated as a disposal for CGT purposes. This means that any increase in value since acquisition may be subject to capital gains tax at the time of the gift, even though no sale proceeds are received.

There are also practical considerations. Once a property is gifted, the donor will no longer have control over the asset or entitlement to the rental income. This can have a significant impact on cashflow and financial security, so it is important to consider whether the arrangement remains suitable in the longer term.

Use of trusts

Trusts can be used as part of inheritance tax planning to help manage how and when assets are passed on. In broad terms, assets placed into a trust are no longer owned personally by the individual, which may help to reduce the value of their estate for inheritance tax purposes over time.

Trusts may be appropriate where there is a desire to retain a level of control over how assets are used, for example where beneficiaries are younger, financially inexperienced, or where there are concerns around asset protection. They can also be considered where flexibility is needed in how assets are distributed in the future.

From a tax perspective, the position can be more complex than outright gifting. Some types of trusts can give rise to an immediate inheritance tax charge where values exceed available thresholds, as well as ongoing charges during the life of the trust and on exit. The precise treatment will depend on the type of trust used and the circumstances involved, so advice should be taken before any arrangement is put in place.

Joint ownership and succession planning

Transferring or sharing ownership of property with family members can form part of longer-term inheritance tax planning. This may involve adding individuals to the legal ownership or structuring ownership so that value passes gradually over time.

Care is needed, as adding family members to a property can have both tax and practical implications. For example, it may be treated as a disposal for capital gains tax purposes, and there may also be stamp duty land tax considerations where debt is involved. In addition, bringing others into ownership can expose the property to risks such as relationship breakdowns or creditor claims.

It is also important to distinguish between legal ownership and beneficial ownership. In some cases, individuals may be named on the title but not entitled to the underlying value, or vice versa. The structure adopted can affect both tax outcomes and how the asset is treated for succession purposes.

Other items to consider

Various reliefs and exemptions may be available, depending on your circumstances, which can help reduce the inheritance tax payable on your estate. These include:

Annual exemption: Each individual can make gifts of up to £3,000 in each tax year which may be exempt from inheritance tax. Any unused allowance from the previous tax year may also be carried forward. This means that, in some cases, a couple who have not used their exemptions in the previous year may be able to gift up to £12,000 without an immediate inheritance tax charge.

Gifts out of regular income: Where an individual has surplus income, it may be possible to make regular gifts which are exempt from inheritance tax. To qualify, the gifts must form part of a normal pattern of giving, be made from income rather than capital, and not affect the donor’s standard of living. The rules in this area are detailed, and careful record-keeping is important.

Tax efficient investments: There are a range of investment options which may offer inheritance tax advantages, depending on individual circumstances. We do not advise on specific investment products, but we can provide guidance on the general tax treatment. Where appropriate, we can introduce you to an independent financial adviser who can advise on suitable options.

It is important to note that IHT rules and thresholds change, and it is important to regularly review and seek professional advice.