7 September 2026
A landlord may 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 that they have will form part of their estate at death and, unless they are sheltered by allowances, inheritance tax (IHT) will be payable at the rate of 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 market value of the property at 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 worked out using the market value at 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. The rate will depend upon the amount of income the landlord has, in the tax year of the gift.
If the property is a residential property in the UK, the gain must be reported to HMRC within 60 days of completion and the capital gains tax paid within the same time frame.
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 worked out by reference to the market value as the connected person rules apply.
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 will 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 the rate of 40%. Of course, the worst case scenario is 24% CGT and IHT at 40% creating a 64% tax rate, so decisions needs to be made carefully.
If the landlord does not survive seven years, IHT will be payable. Taper relief applies to reduce the rate of IHT 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.
Beware the GWROB rules
It is important that the donor, does not benefit from any future monies from the property – be that on a future sale or via any rental income.
For instance, 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 of benefit (GWROB), rules meaning it will be included in the death estate and liable to IHT.
If you are considering gifting an investment property to your children or other family members, we can help you understand the potential tax consequences and consider the options available to you.
As ever, we are here to help.
