Can I give my child a buy-to-let and reduce my inheritance tax bill?

Q. My wife and I own a buy-to-let in addition to the property (worth more than £1 million) that we live in. What is the most tax-effective way to give the buy-to-let to our child, who is already on the property ladder? Should it be via our will, a gift it in our child’s name without any reservation or a gift to a company in our child’s name? Or is there another way? Name and address supplied

Before passing assets to your children it is a good idea to first have a conversation about whether they are happy to have it and, in this instance, whether they are comfortable being a landlord and running the property business. A gift must be irrevocable to be effective for inheritance tax (IHT) purposes, so you’ll want to make sure that you will not need the income or equity from the property in the future.

You are correct that for the gift to be effective for IHT planning, you need to ensure that you do not retain any benefit of the property, and that the rental income goes to your child.

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The tax position on each of the options that you’ve suggested is different and the best will depend on your circumstances — you could potentially do a mixture of these options.

Gift in lifetime

A gift in your lifetime is free from IHT provided you survive seven years from the date of the gift. If you pass away within the seven-year period, then the gift would be subject to IHT at up to 40 per cent. The amount of tax due may be reduced if you die between three and seven years of making the gift due to taper relief.

Another tax which may come into play is capital gains tax (CGT). Where transactions, such as gifts, take place between connected people (you and your child are connected for tax purposes), they are deemed to be made at market value.

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What this means is that if the gift is made during your lifetime, you will pay up to 24 per cent CGT on any gain on the transfer — the difference between the cost or value of the property when you acquired it and the market value at the date of the gift. You will need to consider how you will fund the CGT liability if you choose to make an outright gift to your child in your lifetime. It may also be necessary to consider stamp duty.

Gift in your will

If you wait to give the property in your will, then your interest in the property would form part of your estate on death and may be liable to IHT at 40 per cent, subject to any reliefs and allowances and any remaining nil-rate band — worth £325,000 per person.

The value of your assets will be reset to their value at the date of your death for CGT purposes. So leaving your share of the property under your will would not result in a CGT charge and your child’s base cost would be equal to the market value at the time of your death.

Other options

Transferring the property into a company owned by your child would potentially incur a CGT liability for you on the disposal of the property as well as stamp duty for the company. There may also be a lifetime IHT charge, depending on how the transaction is structured. Due to the potential complexities of a transfer to a company, you should get specialist tax advice if this is the option you choose.

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Your child would also need to be comfortable with the additional requirements of running a company, which include annual filings of accounts and corporate tax returns.

An alternative consideration could be to give the property to a trust for the benefit of your child. This may also result in a IHT charge and comes with its own costs, but would allow you to potentially defer any capital gain which may arise to a later date. In addition to the potential tax benefits, a gift to a trust may provide better asset protection and more flexibility for a future transfer of the property or any rental income.

Kate Aitchison is a private client tax partner at the accountancy firm RSM UK. She advises on capital gains tax, inheritance tax, succession planning, investment structuring and tax residency.