Inheritance tax planning for landlord parents

If parents have buy-to-let properties and also have children growing into adulthood to whom they wish to

leave their properties, they can make plans to put the properties into a trust to avoid their children being

hit by a huge IHT bill. The general rule of thumb is, the larger the portfolio the sooner parents should start

to act. As each parent only gets £325,000 nil rate band every seven years, it would take 21 years for

example for two parents to fully transfer a £2m portfolio to into a trust (£325,000 per seven year period x

2 parents x 3 periods = £1,950,000)! For IHT basics, pleases see an early article.


The benefits of putting the properties into a trust are:

  • The properties will not form part of your estate therefore no IHT will be due.        
  • In comparison to giving the properties to children out right, parents as trustees will still have control over how to run the buy-to-let business, even though they can not benefit or enjoy the income and the property.
  • The children, as beneficiaries, only need to pay basic rate tax on rental profit (assuming the children are basic rate tax payers).
  • Stamp duty for transfers to or from a trust is due only on the outstanding mortgage amount of the property. So, although additional tranfers are required by working through the trust, the total stamp duty is likely to be less because it is not based on the full value of the property.
  • Capital gains will be deferred to when the children sell the property. This is achieved by claiming hold over relief.


Roles of stamp duty:

When transferring a property into a trust, the owner parents are “gifting” the property into the trust. This is

not a selling/purchasing transaction, and no stamp duty is due unless the property has a mortgage of

over £40,000. In that case the stamp duty is due on the mortgage amount with a 3% surcharge

applicable. Having a mortgage is not all bad, as it can be used to “adjust” the value transferred to

the trust. (This is where things get slightly complicated). Sometimes it is beneficial to “adjust” the value

because any transfer of value above nil rate band (£325,000 for one parent) will be subject to an

immediate 20% tax for life time transfer. The transfer value is calculated as the property’s market value

minus mortgage.Adjusting the value can be useful because the stamp duty rate is lower than the life time

transfer tax rate. Inaddition, stamp duty is only due on mortgages over £40,000.


For example, if the property is worth £750,000 and has no mortgage, the parents have a few options.

They can transfer the property to the trust with no mortgage, or take out a mortgage of some size to

reduce lifetime transfer IHT even though this could increase the stamp duty. The table below shows that,

for this example, taking out a mortgage of precisely £88,000 will result in the lowest total transfer cost.

The stamp duty will be higher as the mortgage increases.


Transfer into the Trust:

Scenario 1 Scenario 2 Scenario 3
Property value £750,000 £750,000 £750,000
Mortgage £40,000 £88,000
Transfer value £750,000 £710,000 £662,000
Stamp duty £0 £0 £2,640 (3% x £88,000)
Lifetime transfer IHT £17,600 £9,600 £0
Total transfer cost £17,600 £9,600 £2,640


Exit Charge

When the trust transfers the property to the child, the child may have to pay an exit charge. This is calculated as the equity amount above the nil rate band. In the above case £662,000 -£650,000=£12,000, multiply by an effective rate of 20% X 3/10 X 12/40 = 1.8%, giving a charge of £216, assuming the exit happens three years after the property stays in the trust.


Transfer from the Trust to Children:

Scenario 1 Scenario 2 Scenario 3
Property £750,000 £750,000 £750,000
Mortgage £40,000 £88,000
Transfer value £750,000 £710,000 £662,000
Amount above nil rate band £100,000 £60,000 £12,000
Exit charge £18,000 £10,800 £216



Anniversary charge

Seven years after putting the first property into a trust, the parents’ nil rate band will be restored, and they

will be able to put another £650,000 worth of property into the trust. However on the tenth year of the

trust, if the properties are still in the trust and are not distributed to beneficiaries, the trust will be subject

to an anniversary charge. The calculation of this charge is complicated. So as a rule of thumb let’s firstly

say that it is roughly equal to 0.5% per annum of the value of the asset in the trust. For those of you who

are interested,here is the complete calculation.



Asset value The value of the asset in the trust. If the trust has multiple properties, the charge is calculated separately for each property.
Nil rate band The current Nil rate band is £325,000
No. of quarters The number of quarters which the property has been in the trust during the past ten years



Several strategies are available to avoid or reduce the anniversary charge. One is to distribute each

property to the children before the ten-year anniversary. This will avoid the charge completely.

The second is to set up a new trust for each additional property being transferred. This will mean

setting up one new trust every seven years, while there are additional properties to transfer. This

strategy ensures that the first anniversary charge incurred for the second and any additional

properties will be as late as possible. If the landlord parents own several properties, after moving

the properties to the trusts and distributing them to their children they may still have properties

in the trust that are subject to anniversary charge. This will situation will still be much more

favourable than simply doing nothing and leaving all the properties to the children and being

subject to 40% IHT.


Inheritance tax can be complicated. The most effective strategy depends on your specific

circumstances and may not be straightforward to determine, especially when you do not know

what will happen in the future. But at least one thing should now be clear. Whatever your circumstances

– early IHT planning will always be beneficial in the long term.