To sell or not to sell? That is the question.
Many landlords started investing in property during the boom years for buy to let – late 1999s and early 2000s – and some have built-up sizable portfolios over time.
Most of them own their properties in their own names as opposed to through a limited company and that’s the basis on which we analyse the tax take here.
It’s highly commendable to have built up portfolios because not only has their value increased considerably over time, but they also produce an excellent income, and probably have done so for many years.
What’s more, during that period of letting they have provided a valuable community service, giving a roof over the heads of many many tenants. But the difficulty comes when contemplating letting go - retirement.
This article applies primarily to England and is not a full interpretation of HMRC rules. Always seek professional advice before making or not making decisions. Use this guide as the starting point for your research, not an endpoint.
With substantial capital gains gathered within those properties, selling the whole portfolio would probably leave you exposed to a substantial capital gains tax (CGT) bill, whereas holding on could leave your relatives, your heirs with an equally if not greater inheritance tax (IHT) bill.
Both taxes have been affected in one way or another by Rachel Reeve’s Autumn Budget, as well as previous ones, whether that’s by adjusting the tax rate or not increasing allowances year on year.
For example, while the property CGT rates for basic rate taxpayers remain unchanged this time at 18 and 24 percent, allowances per person have come down from £12300 to £3,000 over three years. The nil rate band (NRB) for IHT relief of £325,000 per person has not been increased for 19 years, and there’s no plan to change the allowance until 2028? Taking inflation into account this allowance should be over £600,000 today.
If someone’s estate for IHT purposes exceeds £2m, the RNRB starts to be reduced in any case. It is reduced by £1 for every £2 over £2m, meaning someone with an estate of £2.35m will have no RNRB available to them.
The IHT situation has been made even worse because Rachel Reeves has now included defined contribution pension pots, private pensions (SIPPS), in with IHT, which will “use up” part or all your RNRB inheritance tax allowance depending on the size of your pension.
This was one of the biggest shocks to come out of Rachel Reeves’ first budget and will be keenly felt by those with large pension pots. It brings pensions into the inheritance tax net from 6 April 2027 and will result in many taxpayers having to completely rethink their IHT planning.
Currently, most unused pension funds do not form part of an individual’s estate for IHT purposes. In the future, the changes mean that individuals may not be able to pass on the unused pension funds on death without being included in their estate with their other assets, attracting an IHT charge.
So, as higher tax rates and frozen allowances gradually drag more landlords deeper into the tax net, it could be argued they face a ticking time bomb, a dilemma they face choosing between CGT & IHT.
It has been estimated that as things stand right now, over 600,000 landlords could be passing on a huge tax bill to their heirs, who face paying hundreds of thousands of pounds in death taxes (IHT) due to frozen allowances and a 40 percent tax raid.
Around twenty percent of buy-to-let landlords have portfolios with values more than HMRC’s inheritance tax thresholds, according to accountancy firm RSM. The 2024 English Private Landlord Survey indicated the median age of individual landlords was 59 years old. Almost two thirds (64%) of landlords were aged 55 or older, a similar proportion to the 2021 survey (63%).
Landlords with larger portfolios tended to be the oldest. Over three-quarters (77%) of landlords with five or more properties were aged 55 or older, compared with 57% of single-property landlords.
Half (50%) of individual landlords in the survey were female, 49% were male and 1% identified as ‘other’. The proportion of female landlords has increased since 2021 when 44% said they were female. Male landlords were more likely to have larger portfolios, with 63% of landlords with five or more properties being male.
An estate passed on to children that is owned jointly by a husband and wife, or civil partners, could attract relief of up to £1m. That’s made up of two nil rate bands (£650,000) plus two residential nil rate bands (RNRB), allowed against a main residence (£350).
But with IHT allowances frozen until 2028 and house prices increasing steadily over the years the private residence is likely to use up most if not all the allowances, without taking pensions into account. That’s before you even think about an inherited property portfolio. With IHT charged at 40 percent it is very likely the children inheriting would need to sell off rental properties to pay the tax.
If inheritors are forced to sell, then this reduces the stock of rental properties which are already in short supply. More homes becoming available for sale may sound like a windfall for the first-time buyer, but with inflation and mortgage rates remaining high many are priced out of the buyer’s market and have no choice but to rent. Inevitably tenants will pay the price in higher rents, despite the Government’s argument that rental property sales will reduce the demand for renting.
One possible way around IHT is gifting. There are a range of gifts that are exempt from inheritance tax. One of these is the potentially exempt transfer (PET) where the gift becomes completely tax-free if you live for 7 years after gifting it (assuming that the gift has been given to an individual, rather than a business or trust).
If you die within 7 years of gifting, the asset given would count towards your residential nil-rate band, and be subject to IHT. After 7 years, the gift doesn’t count towards the overall value of your estate. This is known as the 7-year gift rule in inheritance tax.
Under the HMRC 7-year rule no tax is due on any gifts you give if you live for 7 years after giving them - unless the gift is part of a trust. If you die within those 7 years of giving there’s Inheritance Tax to pay, but there are mitigations. For example, gifts given in the 3 years before death are taxed at 40 percent. Gifts given between 3 and 7 years before death are taxed on a sliding scale known as ‘taper relief’, but taper relief only applies if the total value of gifts made in the 7 years before death is over the £325,000 tax-free threshold.
The other main issue with the 7-year gift rule is that the giver cannot receive any further benefit from the gift, either financial or in any other way. So, if you were thinking of relying on the rental income as a pension, this wouldn’t work.
Also, the gift would be treated as a disposal for CGT purposes. CGT of up to 24 percent may be payable.
Depending on the amount of equity to loan value you have in your rental properties you may not be able to afford to sell or gift your property as the tax may exceed the equity in the home, once the mortgage is paid off.
So, selling or gifting, you face having to pay CGT at 18 or 24 percent depending on your other earnings. If you have taxable gains of sales or gifts you will need to make a CGT property report within 60 days of completion and any tax liability must be paid within the 60 days.
If the property has never been your main residence, you would not be entitled to any main residence relief on the disposal. Partial main residence relief might be due if you had previously lived in the property. However, it is possible to apply to pay CGT by yearly instalments.
Tax specialist RSM has estimated that the estates of buy to let landlords facing an inheritance tax bill this year could be 50,000 up compared to last year. A tax timebomb could be awaiting both landlords and tenants. If the tax liabilities of landlords end up reducing the number of rentals on the market, this would make tenants’ lives even more difficult than now if demand forces rental prices up even higher.
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