Seven steps to efficiently pass on your buy-to-let properties
With the inheritance tax threshold frozen at £325,000 for another five years and the news that, from April 2027, pensions will be added to the value of your estate on death, more and more landlords are expected to be drawn into the inheritance tax net.
Yet a recent survey by the National Residential Landlord Association revealed a lack of forward-thinking among property investors.
A third of landlords said they had not considered their future tax liabilities, rising to 43pc for landlords living in London.
With some careful planning, however, steps can be taken to protect the value of your buy-to-lets when you pass them on to the next generation. Here are some things to consider.
Calculate the inheritance tax impact
Knowing your estate's future liability payable on your death is a good place to start, said Robert Leatherland, financial adviser at Bespoke Wealth.
'Landlords will often own their main residence, as well as other assets including investment property, and soon unused personal pension values will also form part of the estate for inheritance tax purposes, increasing the liability even further,' he explained.
'It's important that you understand the overall value of your assets, the future inheritance tax position and the impact this will have on what's being passed on to your loved ones. Seeking advice early on is a crucial part of forming a robust financial plan.'
Some landlords who want or need to continue receiving rental income in retirement may decide to do nothing if they're comfortable losing a portion of their buy-to-let's value to the taxman after they have died.
However, those properties are likely to continue to rise in value, thus pushing the liability even higher.
In addition, holding your properties in a limited company, while more tax-efficient for some landlords, won't shield you from this so-called 'death tax'. A limited company that purely holds residential property will still form part of the estate for inheritance tax purposes.
Knowing how much tax your beneficiaries and loved ones could potentially be landed with often kick-starts landlords into taking action early.
Tax and estate planning
Giving gifts or selling property to reduce the value of your estate, or unburden yourself of your landlord duties in retirement, is often the first port of call, but this could trigger capital gains tax.
In particular, landlords who have held buy-to-let properties for decades could face a steep tax bill thanks to soaring house prices – so selling up could generate a significant charge as well as the loss of income.
This is where estate planning comes in, said Leatherland: 'Under the current rules, capital gains tax is less than the 40pc you'll pay in inheritance tax. By selling a property, although you'll incur capital gains tax on the sale, you're reducing the value of your estate on death, lowering the potential inheritance tax liability for your future beneficiaries.
'Once you have liquidated the property, you can seek advice on what to do with the money to both mitigate future tax liabilities and take an income, depending on your objectives.'
Choosing an inheritance tax-friendly way of purchasing your buy-to-let properties from the outset is also part of a solid succession plan.
A family investment company, for example, can be used to purchase properties. This type of company allows you to pass down shares to future generations in a more efficient way than a standard limited company.
Strategies for gifts
Whether you're planning to retire and want to pass on your properties or business to younger family members, or you simply want to reduce the inheritance tax liability on your estate, it's important to think about your strategy for giving property as a a gift.
You can give away your buy-to-lets to family or friends to remove them from your estate and, if you survive the gift for seven years, no inheritance tax will be payable. If you die within seven years, some inheritance tax is due, with the exact amount calculated using a staggered system known as 'taper relief'.
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