Transferring a buy-to-let property to a child can seem like a smart move to mitigate inheritance tax, but the legal and tax implications are far from simple.
From capital gains tax to stamp duty and trust law, choosing the right strategy is essential to avoid unexpected liabilities and safeguard your estate.
Approximate Reading Time: 4 minutes
Topics Discussed:
- Legal and tax considerations when gifting a buy-to-let property.
- Lifetime gifting vs. inheritance vs. trusts: legal pros and cons.
The Seven-Year Rule in Action
One commonly used inheritance tax planning tool is the lifetime gift.
If you gift a buy-to-let property to your child and survive for seven years, the value of the gift can fall outside your estate for IHT purposes.
However, this is not a tax-free transaction:
- Capital Gains Tax (CGT) applies if the property has increased in value since purchase.
- The gain is calculated on the difference between the purchase price and market value at the time of the gift.
- Residential property attracts a CGT rate of up to 28%.
Additionally, Stamp Duty Land Tax (SDLT) may apply if the property is mortgaged, as HMRC considers the transfer of debt as “consideration.”
Document the transaction clearly. HMRC scrutiny of lifetime gifts is increasing, especially where rental income or partial use continues post-gift. This can potentially trigger a “gift with reservation of benefit.”
Passing Property Through a Will
If you leave the property to your child via your will, CGT is not triggered. Instead, the property’s value resets to its market rate at death, meaning the child inherits a fresh base value, potentially reducing any CGT on future sale.
However:
- Inheritance tax applies at 40% on estate values above £325,000 (or £500,000 if the residence nil-rate band applies).
- Estates over £2 million see tapered reliefs, potentially reducing the residence band.
This method avoids immediate tax charges but may expose your heirs to higher IHT, particularly if no planning has taken place.
If you anticipate rising property values, a will-based transfer may offer the least friction but the highest estate tax exposure.
Legally Complex and Costly
Some clients explore transferring a buy-to-let to a limited company owned by their child.
While theoretically removing the asset from the personal estate, this route is legally and fiscally complex.
Key considerations:
- CGT and SDLT will likely apply at market value, even if no money changes hands.
- The company structure introduces corporation tax, annual filing duties, and compliance responsibilities.
- Potential IHT charges if the gift is not structured properly.
If the transaction is not at arm’s length or involves retained benefit or control, it could fail for IHT purposes: defeating the original intent.
Legal Flexibility with Tax Trade-Offs
Trusts offer a middle ground, allowing you to place the property under the control of trustees for the benefit of your child (or multiple beneficiaries).
Advantages:
- Potential protection from divorce or bankruptcy.
- Allows for staged access to property or income.
- Can be used to skip generations and reduce long-term tax exposure.
Challenges:
- May trigger IHT at 20% on lifetime gifts into trust above the nil-rate band.
- Subject to periodic charges (up to 6%) and exit charges if structured incorrectly.
- Still potentially liable to CGT and SDLT at point of transfer.
Trusts require a tailored approach. They are most suitable for clients with high-value estates or long-term wealth transfer goals.
Summary
Gifting a buy-to-let property to your child involves balancing inheritance tax relief with capital gains exposure, stamp duty rules, and ongoing legal responsibilities.
Whether through a lifetime gift, will, company transfer, or trust, each route has its legal trade-offs.
At Help Me Legal, our solicitors can assess your unique situation and ensure that your property gift is structured legally and tax-efficiently, without exposing your family to unnecessary risk.
Contact Help Me Legal today at 01772 282768, fill in our contact form here, or reach out via our 24 hour WhatsApp at +447816848188.