Inheritance and family
Inheritance tax planning for landlords: the options compared
Gifts, Family Investment Companies, trusts, life insurance and pensions compared for landlords, and why Business Relief rarely helps a rental portfolio.
For many landlords, the portfolio is the largest part of their estate, and it is taxed at 40% above the available nil-rate bands. Let property also has a disadvantage most business owners don't face: it almost never qualifies for Business Relief. So the planning has to come from somewhere else.
This article compares the main options, what each costs, and where each fits.
The starting point
- Nil-rate band: £325,000 per person.
- Residence nil-rate band: up to £175,000 per person, for a home passing to children or grandchildren. Reduced by £1 for every £2 the estate exceeds £2 million.
- Unused bands transfer to a surviving spouse or civil partner. Thresholds are frozen up to and including 2030/31.
- Business Relief: not available where the business is mainly holding investments. HMRC says a property rental business is likely to fall within that exclusion.
An illustration
These figures are illustrative only. A widow inherits her husband's estate and unused bands. On her death she owns her home (£500,000) and a portfolio with net equity of £1.5 million.
| Estate £2.0m | Estate £2.3m | |
|---|---|---|
| Nil-rate bands (2 × £325,000) | £650,000 | £650,000 |
| Residence nil-rate bands | £350,000 | £200,000 (tapered) |
| Taxable | £1,000,000 | £1,450,000 |
| IHT at 40% | £400,000 | £580,000 |
The extra £300,000 of portfolio value costs £180,000 in tax, an effective 60%, because of the taper. Our landlord IHT calculator shows your own position.
The options compared
| Option | How it saves IHT | Main drawbacks |
|---|---|---|
| Outright gifts | Out of the estate after 7 years | CGT on gift, SDLT if mortgaged, lose income |
| Family Investment Company | Growth accrues to children's shares | Set-up and running costs, corporation tax |
| Trusts | Control while value leaves estate | 20% entry charge above nil-rate band, 10-year charges |
| Life insurance in trust | Pays the bill, doesn't reduce it | Premiums |
| Spending and income gifts | Reduces estate with immediate exemption | Must be from genuine surplus income |
| Pensions | Less useful from April 2027 | Unused funds in the estate from 6 April 2027 |
1. Lifetime gifts of property
An outright gift to an individual is a potentially exempt transfer. If you survive seven years, it falls outside your estate. If you die within three to seven years, taper reduces the tax on the gift.
The catches for landlords:
- Capital gains tax. A gift is a disposal at market value. Holdover relief for business assets doesn't cover let residential property.
- SDLT. If the recipient takes on a mortgage, the debt is treated as payment.
- Reservation of benefit. Keep the rent, and the gift doesn't work for IHT.
- Losing the income. Only give away what you won't need.
Gifting cash from a sale can avoid the SDLT point, though the sale itself may trigger CGT. See passing property to children.
2. Family Investment Companies
A Family Investment Company (FIC) is a private company, often funded by a loan from the parents, whose shares are held partly or mainly by the children. Parents keep control as directors and through voting shares.
Why it works: the loan stays in the parents' estate but doesn't grow. Future growth in the company's value belongs to the children's shares. Gifts of shares are potentially exempt transfers.
Watch-outs: a FIC buying property pays the SDLT higher rates, and moving existing properties into it is a disposal for CGT and SDLT. Income taxed in the company at 19% to 25% must later be extracted. Dividends on shares a parent gives a child under 18 are taxed as the parent's income above £100 a year. See Family Investment Companies, and our specialist practice's guide to inheritance tax and Family Investment Companies (opens in a new tab).
3. Trusts
A discretionary trust lets you move value out of your estate while trustees, often including you, keep control over who benefits.
Costs: transfers in above the £325,000 nil-rate band are charged at 20%. The trust pays up to 6% every ten years and up to 6% on assets leaving it. From 2027/28, discretionary trusts pay 47% income tax on property income. Holdover relief may be available for capital gains on certain gifts into trust, which needs checking case by case.
Trusts suit landlords who want to protect assets for young or vulnerable beneficiaries, or for several generations. They are rarely the cheapest route.
4. Life insurance written in trust
Insurance doesn't reduce the tax, but it can pay it, so the portfolio isn't sold in a hurry to meet the bill. A joint-life, second-death policy is common for couples. Written in trust, the payout is intended to sit outside the estate. Take regulated advice on the policy itself.
5. Using exemptions and surplus income
- £3,000 annual exemption, with one year's carry forward.
- Small gifts of up to £250 per person.
- Wedding gifts: £5,000 to a child, £2,500 to a grandchild.
- Regular gifts out of surplus income, exempt immediately if they don't reduce your standard of living.
Landlords with more rent than they spend can use the last of these to transfer substantial sums over time. Good records are essential.
6. Pensions from April 2027
From 6 April 2027, most unused pension funds and death benefits are included in the estate for IHT. The old strategy of living on rent and leaving the pension untouched is less attractive. It is worth reconsidering which assets you draw on first.
Why Business Relief isn't the answer
Business Relief gives 100% relief on the first £2.5 million of qualifying business property from April 2026. But shares or a business consisting wholly or mainly of making or holding investments don't qualify, and HMRC says a rental business is likely to fall within that. Furnished holiday lets haven't changed that position. Arrangements marketed as converting a rental portfolio into qualifying business property should be treated with great care.
Common mistakes
- Giving a property away but keeping the rent. That's a gift with reservation, so the property stays in your estate, and the gift may still have triggered capital gains tax.
- Gifting a mortgaged property without checking SDLT. If your child takes over the debt, SDLT can be due on it.
- Assuming a company or partnership qualifies for Business Relief. A letting business almost never does.
- Forgetting the residence nil-rate band taper. A large portfolio can remove it, even when the home is modest.
- Relying on the pension as an IHT shelter. That changes from April 2027.
- Leaving it too late. The seven-year clock only starts when a gift is made.
- Uncoordinated wills. Couples whose wills don't work together can waste bands or leave the survivor with less flexibility than they expected.
Putting it together
Most effective plans combine several steps: wills that use both spouses' bands, gifts from surplus income, a FIC or gifts for future growth, and insurance for what's left. The right mix depends on your age, health, income needs and family.
We review the IHT position across the whole portfolio and set out the options with numbers. We work on fixed fees agreed upfront, and respond the same working day. Read more on inheritance tax for landlords.
This article is general information, not advice. Tax rules change and their effect depends on your circumstances. Please speak to us before acting.
