Transferring Property to Family

One of the key concerns of anyone with a significant property portfolio is how to avoid a large Inheritance Tax (IHT) charge on death. Simply giving your investment properties to family members might seem like a straightforward solution, but it could trigger a substantial Capital Gains Tax (CGT) charge if the properties have appreciated in value since you purchased them.

To effectively transfer property while minimising tax liabilities, consider using a trust. By transferring properties into a trust, you can avoid immediate CGT charges, provided the trust is not for the benefit of you, your spouse, or minor children, and it isn’t used as a main residence by any beneficiary. This allows for a tax-efficient transfer of investment properties to your adult children.

The trust can later transfer properties to beneficiaries without incurring CGT, and you can transfer up to the current nil rate band (£325,000) free of IHT. To fully benefit from this strategy, you must survive for seven years after the transfer for the property to be excluded from your estate. After this period, the property will fall under the trust’s tax regime.

While the trust won't completely eliminate IHT, it will be subject to a special discretionary trust tax regime. A tax charge is applied every 10 years, but this rate (typically 3-6%) is significantly lower than the standard inheritance tax rate, and it only applies to the growth in value of the trust assets above the nil rate band. This approach can lead to substantial tax savings when passing on investment properties.