A buy-to-let you still own at death is taxed at 40% above your nil-rate bands, and the extra allowance for a family home usually does not help. Giving it away during your lifetime can take it out of your estate after seven years, but the gift itself is a disposal for capital gains tax at market value, and you cannot keep the rent. The right route depends on your age, your gains, whether you need the income and how many properties you own.
What happens if you keep the property until death
Inheritance tax is charged at 40% on an estate above the £325,000 nil-rate band. There is also a residence nil-rate band of £175,000, but only for an interest in a home you have lived in at some point, passing to children or grandchildren. A buy-to-let you bought purely as an investment never qualifies. A former home that is now let could in principle be nominated, but only one property counts, and the extra band tapers away once the estate passes £2 million. Both bands are fixed at these levels until 5 April 2031.
Business relief is not the answer either. The law excludes any business that consists wholly or mainly of holding investments, and HMRC treats ordinary letting as exactly that. Furnished holiday lets are generally caught too: in the Pawson case the Upper Tribunal held that cleaning, welcome packs and being on call did not turn a holiday bungalow into a trading business. The reforms that took effect on 6 April 2026, which give a £2.5 million allowance for 100% business and agricultural relief, change nothing for landlords, because letting never qualified in the first place.
Holding on does have one advantage. There is no capital gains tax on death, and your children inherit the property at its market value at that date, so the gain built up during your lifetime is never taxed.
Giving the property away during your lifetime
A gift to an adult child is a potentially exempt transfer. If you survive seven years, it falls out of your estate entirely, together with all the growth since the gift. If you do not survive that long, the gift is added back. It uses your nil-rate band first, which can leave the rest of your estate paying more. Where tax is due on the gift itself, taper relief reduces the tax (not the value) once more than three years have passed: to 80% of the full charge in years three to four, then 60%, 40% and 20%.
Three costs and conditions catch people out:
- Capital gains tax now. A gift is treated as a sale at market value. Gains on residential property are taxed at 18% or 24%, and a return and payment are due within 60 days. There is no holdover relief (which would let your child take over your original cost and defer the tax) for a gift of let residential property to an individual.
- You cannot keep the rent. If you carry on receiving the income, or keep any other benefit, the property is a gift with reservation and stays in your estate however long you live. See our inheritance tax planning service for this and the related pre-owned assets charge.
- Stamp duty land tax. A pure gift has no chargeable consideration, so no SDLT. If your child takes over a mortgage, the debt assumed counts as the price, and SDLT may be due on it. If your child already owns a home, the 5% higher rates surcharge can apply to that amount. In Scotland the equivalent tax is land and buildings transaction tax, and in Wales land transaction tax, each with its own rates and surcharge.
Selling to a child for less than market value is a part gift. The shortfall is a transfer of value for inheritance tax, capital gains tax is still worked out on market value, and the child pays SDLT on what they actually pay.
A worked example
Helen is a widow and a higher rate taxpayer. Her estate is her home worth £600,000, a flat let since she bought it for £150,000 and now worth £400,000, and £100,000 in cash. Everything goes to her two children. For simplicity, values stay level, and we ignore the annual exemption, costs and her late husband's unused bands.
If she gives the flat away now, the gain is £250,000. After the £3,000 annual exempt amount, capital gains tax at 24% is £59,280, paid from her cash.
| Scenario | Capital gains tax | Inheritance tax | Total |
|---|---|---|---|
| Keeps the flat until death | £0 | £240,000 | £240,000 |
| Gives it away and survives seven years | £59,280 | £56,288 | £115,568 |
| Gives it away and passes away after four and a half years | £59,280 | £204,288 | £263,568 |
Keeping it: £1.1 million less £500,000 of nil-rate bands leaves £600,000 at 40%. Surviving seven years: the estate is £640,720, and £140,720 is taxed. Passing away after four and a half years: the gift uses all £325,000 of the nil-rate band, so £75,000 is taxed at 40%, and taper cuts that £30,000 to £18,000, payable by the children. The estate then has only the £175,000 residence band, leaving £465,720 at 40%, or £186,288. In that case the gift costs more than doing nothing, and the children have also lost the uplift on death.
Gifting into a discretionary trust
A trust lets you give the property away while trustees keep control. The gift is a chargeable lifetime transfer: inheritance tax at 20% on anything above your available nil-rate band, so £15,000 on Helen's flat if the trustees pay (more if Helen pays it herself, because the gift is then grossed up). If you do not survive seven years, the gift is taxed again at the full 40% rate, with taper relief and credit for the tax already paid, and it uses your nil-rate band before your estate does, so the seven-year clock still matters. Couples who own jointly can each use their own £325,000 band, if they have made no other chargeable gifts in the last seven years. Because the gift is immediately chargeable, holdover relief is available, so no capital gains tax is paid now and the trustees take over your base cost.
The trade-off is ongoing tax. Trusts face a charge every ten years of no more than 6%, plus exit charges when property leaves. On a £400,000 trust with a full nil-rate band available at the anniversary, the ten-year charge would be about £4,500. Holdover is denied if you, your spouse or your children under 18 can benefit, and keeping any benefit yourself is a reservation. See our trusts service.
Family investment companies and other alternatives
- A family investment company. Parents fund a company that buys future properties. Children hold shares, often growth shares, so the increase in value builds up outside your estate, while you keep control through voting shares and directorships. Moving properties you already own into a company is a sale at market value for capital gains tax, and SDLT applies at market value because you are connected with the company. Read incorporating a property portfolio first.
- Gift surplus income, not the property. Regular gifts made from income that leave you able to keep your usual standard of living are exempt straight away, with no seven-year wait. Many landlords use their rent this way, which needs good records.
- Life insurance written in trust. A policy held for your children pays out to them rather than to your estate, and can fund the tax on the property. Premiums are gifts, but are often covered by the annual exemption or the income exemption.
Income tax once your children own it
The rent becomes your child's income, taxed at their rates. They will need to register for Self Assessment, and Making Tax Digital applies from 6 April 2027 if qualifying income exceeds £30,000 for 2025/26, and from April 2028 at £20,000. Our post on property income tax rates from April 2027 explains the new rates. For children under 18, income from capital a parent gave them is taxed on the parent if it is more than £100 in a tax year, so gifting to minors saves no income tax.
What to do now
- List each property with its current value, original cost and mortgage, and work out the gain on each.
- Estimate your estate today, including most unused pension funds, which come into inheritance tax from 6 April 2027 (see pensions and inheritance tax).
- Decide how much rental income you need to live on, as this rules some routes in or out.
- Make sure your will matches the plan: read wills and inheritance tax and how much is inheritance tax.
- Take advice before any transfer, because capital gains tax and SDLT are triggered on the day it happens.
If you would like us to model the options for your own portfolio, book a consultation.
This article is general information about UK tax, based on the law and HMRC practice at the date shown above. It is not advice, and reading it does not make you our client. Tax rules change and their effect depends on your circumstances, so please speak to us before acting on it.