Why landlords should consider gifting property to their children sooner rather than later

The COVID-19 pandemic caused changes to the UK’s property market, specifically in inheritance tax and stamp duty. Inheritance tax is the tax on the estate of someone who has died. This includes the deceased person’s property, money, and possessions. The standard UK inheritance tax rate is 40% on the portion of your estate that’s above the legal threshold, which is £325,000. Landlords with estates worth more than £325,000 must pay a large sum of inheritance tax to the treasury.

For example, if a landlord’s estate is worth £1,000,000, they would pay 40% inheritance tax on £675,000, which comes to £270,000 in tax.

How is inheritance tax different this year?

In July 2021, UK landlords paid a record amount of inheritance tax to the treasury—a total of £570 million. This is the highest amount of UK inheritance tax paid in history in July. Between April and July of this year, UK landlords paid a whopping £2.1 billion in inheritance tax, which is £510 million more than the same period in 2020.

Experts think the high amount could be linked to the high number of deaths due to the pandemic. Additionally, more estates had values above £325,000 due to rising UK house prices, as well as the Chancellor’s decision to freeze nil rate and residence nil rate bands until 2026. This freeze also contributed to increased estate values and UK inheritance tax bills.

Stamp Duty Land Tax (SDLT) is a tax property buyers pay for land or property over a certain price in England and Northern Ireland. Although stamp duty receipts declined from April 2020 to March 2021, July 2021 saw a record amount of stamp duty paid, at £1.3 billion. Experts believe this was caused in part by the lowered SDLT threshold from £500,000 to £250,000. Moreover, the new 2%, non-resident surcharge and overall increase in property purchases might have also contributed to the record stamp duty paid.

What are the tax changes on the horizon?

Luckily, there are certain perks and exemptions for inheritance tax rules that help minimise the loss to your estate. However, experts predict that the UK government will continue to maximise their inheritance tax payouts by removing or reducing reliefs, focusing on lifetime gifts, or even revoking the capital gain exemption on death.
How can we keep as much of our estates as possible with these imminent tax changes?

With these imminent inheritance tax changes, landlords should start thinking about estate planning early. Gifting property to children well before a landlord’s death could save them taxes down the line.

Property gifts don’t have the same inheritance tax implications as inheritance upon death. If a donor dies within three years of gifting property, the recipient will need to pay the full 40% of inheritance tax on the eligible portion. However, 8 percentage points will be removed from the inheritance tax obligation for every year after three years.

After 7 years, the recipient (children) won’t have to pay any inheritance tax at all, since the property is seen as their asset, and not as an inheritance.

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