Many landlords hope to one day pass their property portfolio on to their children or grandchildren. So what are the rules – and tax implications – around gifting a rental?
Understandably, many landlords take great pride in being able to pass property (and the long-term security that it brings) on to their descendants.
For landlords hoping to leave such a legacy, here are some key points on the rules and exemptions around inheritance tax (IHT) and gifting.
The seven-year rule
- You can give cash or assets as you wish and not pay a penny in IHT if you then live for seven years afterwards.
- You’re also allowed, under what’s known as an annual exemption, to give away up to £3,000 per year free from IHT. This can be given to an individual or several people, as you please.
- If you die less than three years after making a gift outside of the annual exemption, then that gift will be taxed at the 40% rate.* If you die between three and seven years after, there is a sliding tax scale ranging from 32% to 8%.
- There is a £325,000 tax-free IHT threshold. Any non-exempt gifts made in the last seven years of your life use up this threshold. (This is calculated chronologically.)
- There are also exemptions for gifts for weddings or civil partnerships.
Selling a property
Rules also apply to selling your property to a loved one at below-market rate. For example, if your rental is worth £500,000 and you sold it to your son or daughter for £100,000, then the £400,000 discount could be subject to IHT (the seven-year rule applies).
What about setting up a trust?
Some landlords move their rental property into a discretionary trust to remove its value from their taxable estate. However, the property only becomes exempt if you live for seven years after the transfer. There are also capital gains implications when you transfer a rental into a discretionary trust.
Issues to consider
To put it mildly, our tax system is complex. But to ensure you have clarity and peace of mind, you need to think ahead.
It’s always best to seek tax advice from a qualified professional who can provide guidance based on your personal circumstances.
We can help, too, by managing your rental property and working towards your short, mid and long-term financial goals.
To find out more about our property management services, call us today.
