A landlord will need to consider whether it is better to pass on an investment property during their lifetime or on their death. Here, we look at the associated tax implications.
On death
Where a landlord dies, any investment properties they have will form part of their estate at death and, unless they are sheltered by the nil-rate band, inheritance tax (IHT) will be payable at 40%.
However, there will be no capital gains tax to pay. The property benefits from a tax-free uplift at death, and the beneficiary’s base cost will be the property’s market value on the date of death.
The maximum exposure here is 40% of the value at the date of death.
Gifting the investment property
In a bid to avoid a hefty IHT charge, landlords may decide it is better to give their investment property to their children while they are still alive. However, if the property has increased in value since they purchased it, this will trigger a capital gains tax charge, even though the landlord does not receive any proceeds. This is because, where an asset is gifted to a connected person (such as a child), the capital gain will be calculated using the market value on the date of the gift. Any gain not sheltered by the annual exempt amount (£3,000 for 2026/27) or by losses will be taxed at 18% where the landlord’s income and gains fall in the basic rate band (£37,700 for 2026/27) and at 24% once the basic rate band has been used up.
If the property is residential in the UK, the gain must be reported to HMRC within 60 days of completion, and the capital gains tax paid within the same period.
If the landlord does not have sufficient funds elsewhere to meet the capital gains tax liability, consideration could be given to selling the property to the child for an amount equal to the capital gains tax. Although there will be some consideration here, the gain is still calculated with reference to the market value, as the connected person rules apply.
The child’s base cost for capital gains tax purposes is the market value of the property.
If the landlord lives for at least seven years after the date of the gift, it falls out of the estate for IHT purposes. Here, the landlord would have paid capital gains tax at a maximum of 24%, whereas if the property had been passed on at death, IHT would have been payable at 40%.
If the landlord does not survive seven years, IHT will be payable. Taper relief reduces the IHT rate on the gift (where it is not sheltered by the nil rate band) if the landlord lives for at least three years from the date of the gift. However, if the landlord dies within five years of making the gift, the combined capital gains tax and IHT tax hit will exceed 40%. The maximum exposure is 64% if the person gives away the property, paying capital gains tax at 24%, and then dies within three years, triggering an IHT bill of 40%.
Beware of the GWR rules
If the property continues to be rented out after it has been given away, it is important that the former landlord does not continue to receive the rental income, as this will render the gift ineffective for IHT purposes under the gifts with reservation (GWR) rules, meaning it will be included in the death estate and liable to IHT.
