Inheritance tax advice for UK landlords

 

Any rental properties you own will be considered part of your estate when the time comes for your family to inherit. We’ll help you keep that tax bill down.

Simon Thandi, UK Landlord Tax

Hi, I’m Simon.

I’m one of the Directors of UK Landlord Tax and I’m also a landlord, just like you. One of the reasons property makes such an attractive investment is because of its potential to provide financial rewards not only for you but also for your family after you’ve gone. Inheritance tax can eat away at that legacy but there are ways to reduce its impact. Talk to us to find out more.

Your family should benefit from your wise investments

We make inheritance tax easy by…

Looking at the big picture

Property is just one aspect of your personal wealth. We’ll work with you to build a comprehensive picture of all your assets and income so that you can make smart decisions when it comes to your estate.

Advising on succession planning

When you pass your property on, to whom and how, can all make a difference to the eventual inheritance tax bill. We’ll talk you through the options, help you make the necessary calculations and support you in reaching a decision that works for you and your family.

Getting your will sorted

Working with selected partners, we can help you make sure your will is watertight so that your loved ones get the maximum possible benefit from your lifetime of hard work.

Download our FREE UK Property Tax Guide.

A simple guide to property rental income tax and property capital gains tax for UK Landlords.

Current tax rules

Dealing with HMRC

How our tax system works outside of PAYE

Frequently asked questions

Can I avoid Inheritance Tax?

A good question.

Inheritance tax is often called the tax of choice. You can choose to pay it or avoid it.

If you wish to find out if you can avoid payment of inheritance tax on your estate when you pass away you need to speak to a specialist now.

The longer you leave it, the less time there is to plan.

Other matters such as retaining the right to income and control over assets whilst you are alive and ensuring the assets remain protected for your “bloodline” are also important considerations. 

Each case is individual so do get in touch for an initial appraisal.

What is Inheritance tax?

Inheritance Tax is a tax on individuals who are domiciled (which is not the same as their residency status) and/or resident in the UK. It is usually chargeable on the death of an individual but it can arise on lifetime chargeable transfers.

Will I have to pay Inheritance Tax?

Unless you make lifetime transfers, it is your estate that will be paying the Inheritance Tax rather than you!

There is normally no Inheritance Tax to pay if either:

  • In the case of chargeable transfers, the value of the chargeable transfer plus any other chargeable transfers in the previous 7 years are less than the nil rate band.
  • In the case of death, the value of your estate plus any lifetime transfers in the 7 years prior to death is below the nil rate band.
  • You leave everything above the nil rate band to your spouse, civil partner, a charity or a community amateur sports club. For non-domiciled spouses the amount which can be given is restricted to the nil rate band unless an election has been made by that spouse to be treated as domiciled in the UK..

Even if the estate’s value is below the nil rate band you will still need to report it to HMRC. 

If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren there is a further residential nil rate band added to the general nil rate band for the value of the share of the home up to a maximum of £175,000. So, if the value of the share of the home is more than £175,000, the total nil rate band can increase to £500,000.

If you are married or in a civil partnership and on the first death the chargeable estate (including any transfers made in the previous seven years) were all transferred to your spouse/civil partner then an additional nil rate band is added to the surviving spouse’s/civil partner’s nil rate band at the rate applicable on the survivor’s death. To the extent that the value of the home is left to children then a further £175,000 would be available as a residential nil rate band or up to the value of the property if the value was less than £350,000. Where on the first death chargeable transfers were made to non-spouses/civil partners then the additional nil rate band and residential bands are restricted on a pro rata basis.

With careful planning the combined nil rate band on the second death can be £1 million.

What are the Inheritance Tax rates?

The Inheritance Tax rate is 40%. For chargeable transfers during lifetime the rate is 20%. It is only charged on the part of your estate or the part of the chargeable transfer that is above the unused nil rate band.

For example 

Your estate is worth £525,000 and your nil rate band is £325,000. The Inheritance Tax charged will be 40% of £200,000 (£525,000 minus £325,000). 

The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will.

Who pays the tax to HMRC?

In the case of death, the executor (or administrator if there is no will) pays the Inheritance Tax liability from your estate before distributing the net assets to your beneficiaries. 

People who received gifts from you might have to pay Inheritance Tax on those gifts if your potentially exempt transfers in the previous 7 years were more than the nil rate band at the date of death. 

During lifetime, the Inheritance Tax can be paid by the Donee or the Donor. If the Donor pays the Inheritance Tax then the value of the gift is grossed up. So if there was a chargeable transfer of £60,000 (assuming the nil rate band had already been used) the Inheritance Tax payable by the donor would be £40,000 (£100,000 at 40%) rather than the £24,000 (£60,000 @ 40%) payable by the donee.

How much can I give away as tax free gifts?

You can give away a total of £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’.

If the total gifts in any year (excluding those listed below) are more than £3000, you can also use any unused annual exemption from the previous year. So if you had not made any gifts in the previous year, you could make gifts of up to £6000 in the current year.

  • wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)
  • regular gifts out of income, these amounts must be regular (at least annually – we would recommend a standing order) and out of net income after tax and all expenses (including holidays and other luxuries) – you must be able to maintain your standard of living after making the regular gift
  • payments for the maintenance of a child under 18 (or if over 18 in full time education) or a dependent relative
  • gifts to charities and political parties
  • you can give as many gifts of up to £250 per person as you want during a tax year as long as you have not used another exemption on the same person.
I live outside of the UK. Will I still have to pay Inheritance Tax in the UK when I pass away?

If you are domiciled in the UK then you/your estate pay Inheritance Tax on your worldwide assets. Domicile is not the same as residence, so you can be living overseas but still be domiciled in the UK. If you are not domiciled in the UK, Inheritance Tax is only paid on your UK assets, for example property or bank accounts you have in the UK.

If I have moved to the UK but I am not a British citizen, will I have to pay Inheritance Tax on my worldwide assets?

If you have never been domiciled in the UK and provided that you are not deemed domiciled in the UK then you only pay Inheritance Tax on your UK assets.

HMRC will treat you as being deemed domiciled in the UK if you are one of the following:

  • you have lived in the UK for 15 of the last 20 years
  • you were born in the UK with a UK domicile of origin and then changed your domicile, then you will be deemed domiciled in the UK if you are resident in the UK in at least one of the last two of the previous tax years

If you are deemed domiciled then you pay Inheritance Tax on your worldwide assets.

What is a Potentially exempt transfer (PET)

Outright gifts (after deducting any remaining annual exemption) made to individuals during the lifetime of transferor are usually “potentially exempt transfers” provided the transferor does not obtain any benefit from the asset transferred. As long as the transferor survives for 7 years, the transfer is exempt. If the transferor passes away within the seven years, then the value of the gift at the date of transfer falls into the transferor’s estate for IHT purposes.

What is a Gift with reservation?

If you retain a benefit in the asset gifted, then this would be treated as a gift with reservation unless market consideration is paid for its use. For example, if you were to give the house in which you were living to your children but continued to live there without paying a market rent and covering the usual expenses incurred by a tenant, it would be a gift with reservation. Gifts with reservation fall back into the transferor’s estate on death even if he/she survives for more than 7 years although it would be the value at the date of the gift rather than at the date of death.

What is a chargeable transfer?

A chargeable transfer is a transfer which does not qualify as a PET. The main examples are a transfer into a relevant property trust or a transfer to a company.

Is there Inheritance Tax to pay on Death?

i)  Value the estate

The assets and liabilities of the deceased are valued at the date of death and the funeral expenses are deducted to arrive at the net value of the Estate. The value of any gifts with reservation along with any other gifts (chargeable transfers or PETs) made in the 7 years prior to death (after deducting the annual and other exemptions in question 6) are then added to the net value of the Estate at the date of death to give the total value of the Estate (A).

ii)  Consider any exemptions or reliefs

Any assets left to a UK domiciled spouse or civil partner are exempt transfers so need to be deducted from A. In the case of non-domiciled UK spouses or civil partners, the deduction is the lower of the value of the assets transferred and £325,000.

Any legacies to registered charities are also exempt and need to be deducted from A.

If there are any business or agricultural assets, Business Property or Agricultural Property Relief may be available at 100% or 50% of the value of the relevant assets. (As this is a summary, the rules for each relief are not discussed here). Any relief is deducted from the net value of the relevant asset in the estate.

The Chargeable Estate (B) is A less the exemptions and reliefs above.

iii)  Work out the tax

The tax payable is B at 40%.

Is there capital gains to pay if I make a gift of property to my children?

If a gift is made during lifetime, the relevant asset is treated as disposed at its market value at the date of gift and the difference between this value and its original cost would be liable to CGT. The CGT base cost for the recipient of the gift would then be the same market value. There is no CGT on death.

When making lifetime gifts it is important to consider both CGT and IHT.

Tip: If your life expectancy is likely to be short i.e. under 7 years, you may consider leaving assets to an individual in your will rather than gifting it to them before you die particularly where the asset has a potential capital gain and your estate including the asset is below your available nil rate band.

John (who was a higher rate taxpayer and had assets worth well in excess of £1million) had a let property which he bought for £40,000 in 1993. He no longer needed the rental income, so he gave the property (which was worth £240,000 at the time of the gift) to his son, Clive. Ignoring the annual allowance for CGT, John’s CGT liability would be £56,000. One year later John dies so the £240,000 is added back into John’s estate for IHT purposes therefore creating additional IHT of £96,000 (£240,000 @ 40%). At the date of John’s death, the property was worth £250,000, so had he not made the gift to Clive but left it to him in his will, the IHT liability would have been £100,000 and there would be no CGT. The tax saving from not making the gift prior to death is £52,000 and Clive would have a CGT base cost of £250,000 rather than £240,000 in the case of the gift prior to death.

What is Taper Relief?

Taper Relief can only be considered if the value of the gifts made in the seven years prior to the date of death along with any gifts with reservation are more than the nil rate band. If there’s Inheritance Tax to pay on the excess gifts then the following taper relief is due after three years.

Years between gift and deathTax paid
less than 340%
3 to 432%
4 to 524%
5 to 616%
6 to 78%
7 or more0%

Apart from gifts with reservation, gifts are not counted towards the value of your estate after 7 years.

Beware! Taper Relief is not available where the relevant lifetime gifts are not in excess of the nil rate band, even if there is an Inheritance Tax liability on the remaining estate.

Fees for inheritance tax

If you need advice on Inheritance Tax and need to start a conversation to understand your current position, please get in touch now. The longer you leave things the less time there is to put in place a plan so please do not delay. An initial discussion is usually free of charge and thereafter fees will vary depending on the complexity of your situation, but don’t worry – we’re always focused on offering great value, accuracy and efficiency.

Get in touch for a quote

If you drop us a line, by email or phone, and tell us a bit about your situation, we’ll talk you through what we can do for you and how much it might cost. It might be as simple as a straightforward corporation tax return to account for the additional income you derive from renting property, or maybe you need comprehensive tax advice with your role as a landlord being only part of the picture. Either way, our expert team loves to talk property tax and share their wisdom.

Let‘s talk about property tax today

When it comes to fixed-fee tax returns for UK landlords, nobody does it better.

Our inheritance tax services are for you if you…

Have inherited property

If you’ve acquired a house or flat on the passing of a loved one, we can advise on calculating and managing any inheritance tax for which the estate is liable.

Hope to pass on property

Whether it’s one flat or a whole portfolio of houses, there are steps you should take right now to make sure your estate doesn’t have to pay for than it’s fair share of inheritance tax.

Have questions about inheritance tax

The UK Landlord Tax team loves considering and answering knotty tax problems. If you’ve got an unusual estate planning conundrum and want expert advice that takes into account your entire financial situation, talk to one of our team today.

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What a refreshing experience

“We are overseas and have a property in the UK. We had a stressful time finding a suitable firm to look after our affairs... What a refreshing experience to find a company that was so helpful, so considerate, and took time to listen to our concerns. Nothing was too much trouble for them. They have just completed my tax return and although I had issues trying to find my way around portals and so on, they were magnificent in guiding me through what I considered to be a maze."

A Jones, July 2019

Via FreeIndex, edited for clarity

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