How IHT applies to buy-to-let property
- The full market value of each rental property, less any outstanding buy-to-let mortgage, is included in the deceased's estate for IHT purposes
- IHT is charged at 40% on the estate above the available nil rate bands
- Business Property Relief does NOT apply to standard buy-to-let residential property — rental property is investment, not a trading business
- Nil rate band (NRB): £325,000 per person (2025/26, frozen until 2030). Unused NRB transfers to surviving spouse or civil partner
- Residence nil rate band (RNRB): up to £175,000 per person, available only when a main residence passes to direct descendants — not available for buy-to-let properties
- The RNRB tapers at £1 for every £2 of net estate above £2 million — large buy-to-let portfolios frequently push estates above this threshold
Lifetime gifts and the seven-year rule
- Gifts made more than 7 years before death are fully exempt from IHT. Gifts within 7 years attract tapered IHT from 40% (within 3 years) to 8% (6–7 years)
- Gifting a buy-to-let property triggers CGT on the accumulated gain at market value — CGT and IHT planning must be considered together
- Annual gift exemption: £3,000 per year (can carry forward one year). Normal expenditure out of income is immediately exempt without a 7-year requirement
- 'Gift with reservation': if you give away a property but retain any benefit from it (e.g. continue receiving the rent), the gift remains in your estate regardless of the 7-year rule
Joint ownership and estate planning strategies
- Tenants in common: each owner's share passes by will, enabling the nil rate band to be used on the first death by leaving a share to children
- Spouse or civil partner exemption: transfers between spouses and civil partners are completely exempt from IHT, deferring IHT to the second death
- Discretionary trusts: buy-to-let properties can be held in trust outside the landlord's estate (subject to 10-year anniversary and exit charges), but specialist legal advice is required
- Limited company shares: shares in a property investment SPV are still included in the estate and do not attract BPR — however, holdover relief on gifting unquoted company shares can make lifetime gifts more CGT-efficient
- Charitable giving: leaving at least 10% of the net estate to charity reduces the IHT rate from 40% to 36%