Seven steps to efficiently pass on your buy-to-let properties

 Failing to think about what will happen to your properties when you die or want to retire could have costly implications for you and your family. That’s why it’s vital to have a buy-to-let succession plan in place.

With the inheritance tax threshold frozen at £325,000 for another five years and the news that, from April 2027, pensions will be added to the value of your estate on death, more and more landlords are expected to be drawn into the inheritance tax net.

Yet a recent survey by the National Residential Landlord Association revealed a lack of forward-thinking among property investors.

A third of landlords said they had not considered their future tax liabilities, rising to 43pc for landlords living in London.

With some careful planning, however, steps can be taken to protect the value of your buy-to-lets when you pass them on to the next generation. Here are some things to consider.

Calculate the inheritance tax impact

Knowing your estate’s future liability payable on your death is a good place to start, said Robert Leatherland, financial adviser at Bespoke Wealth.

“Landlords will often own their main residence, as well as other assets including investment property, and soon unused personal pension values will also form part of the estate for inheritance tax purposes, increasing the liability even further,” he explained.

“It’s important that you understand the overall value of your assets, the future inheritance tax position and the impact this will have on what’s being passed on to your loved ones. Seeking advice early on is a crucial part of forming a robust financial plan.”

Some landlords who want or need to continue receiving rental income in retirement may decide to do nothing if they’re comfortable losing a portion of their buy-to-let’s value to the taxman after they have died.

However, those properties are likely to continue to rise in value, thus pushing the liability even higher.

In addition, holding your properties in a limited company, while more tax-efficient for some landlords, won’t shield you from this so-called “death tax”. A limited company that purely holds residential property will still form part of the estate for inheritance tax purposes.

Knowing how much tax your beneficiaries and loved ones could potentially be landed with often kick-starts landlords into taking action early.

Tax and estate planning

Giving gifts or selling property to reduce the value of your estate, or unburden yourself of your landlord duties in retirement, is often the first port of call, but this could trigger capital gains tax.

In particular, landlords who have held buy-to-let properties for decades could face a steep tax bill thanks to soaring house prices – so selling up could generate a significant charge as well as the loss of income.

This is where estate planning comes in, said Leatherland: “Under the current rules, capital gains tax is less than the 40pc you’ll pay in inheritance tax. By selling a property, although you’ll incur capital gains tax on the sale, you’re reducing the value of your estate on death, lowering the potential inheritance tax liability for your future beneficiaries.

“Once you have liquidated the property, you can seek advice on what to do with the money to both mitigate future tax liabilities and take an income, depending on your objectives.”

Choosing an inheritance tax-friendly way of purchasing your buy-to-let properties from the outset is also part of a solid succession plan.

A family investment company, for example, can be used to purchase properties. This type of company allows you to pass down shares to future generations in a more efficient way than a standard limited company.

Strategies for gifts

Whether you’re planning to retire and want to pass on your properties or business to younger family members, or you simply want to reduce the inheritance tax liability on your estate, it’s important to think about your strategy for giving property as a a gift.

You can give away your buy-to-lets to family or friends to remove them from your estate and, if you survive the gift for seven years, no inheritance tax will be payable. If you die within seven years, some inheritance tax is due, with the exact amount calculated using a staggered system known as “taper relief”.

If you own your properties within a limited company, you can give shares in your company to pass on a portfolio you have spent years building up to the next generation. The same seven-year rule also applies here.

However Ian Cook, chartered financial planner at Quilter Cheviot, says this strategy should be given careful consideration:

“You’re not just giving away shares, you’re giving away income and control,” he warned. “If a child or beneficiary experiences relationship breakdowns or financial trouble, those hard-earned assets could fall into unintended hands.”

Don’t forget your will

You may want to bequeath your buy-to-let properties to the next generation of aspiring landlords. By leaving the property in your will, you’re not only passing down financial security but a valuable income-generating asset.

Like with any asset you hold, your will is executed according to your wishes. You can stipulate exactly who you want those properties left to – for example, a younger family member who may already be an experienced landlord or wants to start their own portfolio.

Consequences if you die without a plan

Inheritance tax must be paid within six months, and interest applies if it’s not settled. Assets such as buy-to-lets can’t be sold to settle the bill until probate has been granted, and probate will not be granted without the tax bill being settled.

On top of finding the money to pay the estate’s tax bill, your family could also get lumbered with multiple tenanted properties to either sell or manage, which is often time-consuming and stressful.

For example, selling buy-to-lets with a tenant in situ limits your pool of buyers to other landlords and could be a lengthier process than selling an empty property.

Having a plan in place can help to relieve some of this admin burden from your family.

As well as stating who the properties will be left to in your will, you can also indicate where you keep tenancy records, useful contacts, and a record of your letting manager’s details (if you use one).

If you regularly use a particular estate agent because of their reputation for securing a speedy sale, leave those contact details behind for your family.

Responsibilities to tenants

Beneficiaries who inherit a buy-to-let property with tenants assume the former landlord’s responsibilities to maintain and provide a safe place for the tenant to live.

Tenants must be told that they have a new landlord within two months of the change of ownership or by the time the next rental instalment is due (whichever comes first) by way of a Section 3 notice.

Under the current rules, tenants can stay in the property until the end of their fixed term. After that, they need to be served at least two months’ notice if you plan to sell the property.

Stamp duty implications of inheriting buy-to-let

Leaving behind a buy-to-let portfolio, or even a single property, to a beneficiary will still trigger stamp duty implications when they buy a property for themselves.

Anyone who already owns a property and buys another is charged a higher rate of stamp duty at 5pc, on top of residential stamp duty rates.

First-time buyers also lose the right to claim relief on their purchase, even if they have sold the inherited property before buying their own home.

Ordinarily, first-time buyers do not have to pay stamp duty on the first £300,000 of their property purchase. But if they have previously owned a property, even by way of inheritance, this drops to £125,000.

By selling it before buying their first property, they would not be liable for the 5pc additional stamp duty on top.