Gifting Buy-to-Let Property: Tax Tips & Advice

Landlords constantly seek ways to minimise tax and often devise innovative strategies to outsmart HM Revenue & Customs.

Unfortunately, most tax-saving schemes are ineffective and primarily benefit advisers, who pocket substantial fees and leave the landlord to deal with the aftermath.

Many landlords wish to pass buy-to-let property on to their children, but the taxman has covered them in many ways.

So what is the best way of gifting a buy to let to children?

The first step is having a conversation. Like the birds and the bees, the discussion is meaningful and shapes a family's life for years to come.

You need to know that your children understand the responsibilities of owning rental property and if they want to take on the landlord role.

If not, your succession plans are scuppered. If they agree, you can explore the most tax-effective way to gift the property.

For the landlord, do you transfer the property while still alive or on your death?

Gifting a property while still alive is fraught with pitfalls.

Leaving a property in your will

On your death, the property is part of your estate and may be liable to inheritance tax charged at 40 per cent. Chancellor Rachel Reeves is believed to be investigating IHT reforms, so the tax treatment of property left in a will may well change in October’s Budget 2024.

On death, capital gains tax may also come into play.

There’s no CGT to pay on your death, but whoever inherits the policy may pay CGT if they gift or sell the property. Their base cost for CGT is the market value on your date of death, not your purchase price.

Gifting in your lifetime

It’s vital to understand a lifetime gift is without any strings attached. That means you lose control of the property. Any generated rent goes to the new owner, which could alter their tax status by increasing their earnings.

Gifting the property in your lifetime is free from IHT, provided you survive seven years after making the gift. 

Gifts given in the three years before your death are taxed at 40%.

Gifts given 3 to 7 years before your death are taxed on a sliding scale known as 'taper relief'.

Taper relief only applies if the total value of gifts made in the seven years before you die is over the £325,000 tax-free threshold.

IHT taper relief rates

Source: HMRC

The gift may trigger other taxes, such as CGT and Stamp Duty.

Under CGT rules, parents and children are ‘connected’ people and any property transaction between them is taxed at 18 or 24 per cent.

Stamp Duty depends on the property's value, but buy-to-let properties are additional, attracting a 3 per cent surcharge on the standard rates. Owning a buy-to-let also prevents someone from becoming a first-time buyer.

Other options for gifting a buy-to-let include managing the property with a company or putting the property in trust.

Both options come with tax complications that should be part of The Conversation.

Find out more about IHT and gifting property.