Passing On An Investment Property: Lifetime Gift Or Leave It In The Will?

Passing on an investment property is rarely as simple as handing over the keys.

For landlords, there can be a big difference between gifting a property during your lifetime and leaving it to someone in your will. The right answer depends on the value of the property, the gain built up over time, your wider estate, your cash position and how long you are likely to survive after making any gift.

It is one of those areas where a decision made for good family reasons can create an unexpected tax bill if it is not planned properly.

Leaving the property on death

If you still own the investment property when you die, it will normally form part of your estate for inheritance tax purposes.

Inheritance tax may be payable at 40% to the extent that your estate exceeds the available nil rate bands and reliefs.

However, there is an important capital gains tax point. On death, the property is rebased to its market value. This means the person inheriting the property effectively receives it at its value at the date of death, rather than at your original purchase cost.

So while inheritance tax may be an issue, there is normally no capital gains tax charge on death.

Gifting the property during your lifetime

A lifetime gift can sound attractive, especially if you are trying to reduce the value of your estate for inheritance tax.

But for capital gains tax, a gift to a connected person, such as a child, is treated as taking place at market value. This applies even if no money changes hands.

That means if the property has increased in value since you bought it, you may have a taxable capital gain at the point of the gift.

For residential property, the gain may need to be reported to HMRC and the tax paid within 60 days of completion.

This can create a practical cashflow problem. You may have given the property away, received no sale proceeds, but still have a capital gains tax bill to pay.

The seven-year rule

For inheritance tax, a lifetime gift may fall outside your estate if you survive at least seven years after making the gift.

That can be very valuable.

However, if you die within seven years, the gift may still be brought back into the inheritance tax calculation. Taper relief may reduce the tax if you survive at least three years, but this does not always produce the result people expect.

In the worst cases, a poorly timed gift can produce both a capital gains tax bill during lifetime and an inheritance tax charge on death.

Watch the gift with reservation rules

A further trap is the gift with reservation rule.

If you give away the property but continue to benefit from it, HMRC may treat the gift as ineffective for inheritance tax purposes.

For example, if you gift a rental property to your child but continue receiving the rental income, the property may still be treated as part of your estate when you die.

That can defeat the whole purpose of the planning.

The key point

Passing on property is not something to do casually.

There may be a good reason to gift during lifetime. There may also be a good reason to leave the property in your will. The important thing is understanding the full tax position before making the decision.

At williams lester accountants, we help landlords look at the numbers clearly, so they can make informed decisions rather than expensive assumptions.