The Great Wealth Transfer

What every landlord should know before HMRC gets there first…

Most landlords, by definition, have some wealth behind them. Putting aside the ideological debate about equality and privilege, most landlords want to build wealth throughout their lifetime and eventually pass on as much of their hard-earned wealth as they can, as tax efficiently as possible. 

That means avoiding giving a large chunk to the taxman. The combination of capital gains tax (CGT) and inheritance tax (IHT) often means that more than half your family wealth gets taken in tax.‍

A significant transfer of wealth

It’s been estimated that over the next three decades, between £5.5 and £7 trillion will pass from the baby boomer generation to their children and grandchildren. It’s all part of a global shift where tens of trillions in wealth will get managed, preserved, and distributed. Around 70 per cent of this wealth being transferred will be property. See: https://ifs.org.uk/taxonomy/term/464 

Last Sunday's Sunday Times devoted a significant amount of space to the subject, and for good reason. The scale of what will happen has few historical precedents, and for the many small-scale landlords who make up the backbone of Britain's private rented sector, the implications are both pressing and personal.

This article is for general information purposes only and does not constitute legal, tax, or financial advice. Readers should seek regulated professional advice tailored to their individual circumstances.

The above statistic should concentrate the mind of anyone who has spent years assembling a portfolio of residential or commercial lets and other investments. The debate about whether inherited wealth is a good or bad thing for society will no doubt continue unabated. But when push comes to shove the majority of those with wealth - often built over a working lifetime – the question is not whether they want to pass it on, but how to do so without the taxman taking too much. 

The UK inheritance landscape

The last couple of budgets have resulted in something of a raid on wealth transfer, particularly on the farming and business communities but also on the private individual.

The inheritance tax (IHT) nil-rate band (NRB), the tax-free allowance that everyone gets, free of tax - a tax that has remained frozen at £325,000 since 6 April 2009 and is now frozen until at least April 2031.

If this NRB had kept pace with inflation (based on CPI) since it was frozen in 2009, it would be worth around £450,000 today and by 2031 it is estimated at nearer £525,000.

What’s left of your estate over and above this NRB means a big chunk of cash for the Treasury. At 40 per cent tax, it simply gets subsumed into the government’s coffers. What’s more, the phenomenon known as "fiscal drag" means that with inflation and every passing year, more and more people get drawn into the inheritance tax net.

The residence nil-rate band

For a couple leaving a main residence to their direct descendants, their allowances are combined rising to £1 million when the residence nil-rate band (RNRB) of £175,000 per person is added. 

Given that the average UK house price in January 2026 was just over £300,000, and that pension pots will be included in estates from April 2027 onwards, it won’t be exceptional for the average Joe public’s estate to be liable to IHT. 

For those landlords who saw their properties as their pension and as a tax-efficient vehicle for passing on wealth, recent changes mean their calculations are significantly altered. Add one or two or even more rental properties to the estate, and a SIPP pension on top of the family residence, and most landlords will find themselves with a significant IHT liability.

Pensions now included 

As far as pension pots go, most defined contribution (DC) pensions - such as Self-Invested Personal Pensions (SIPPs) and workplace schemes - will be subject to IHT, whereas Defined benefit (DB) pensions, which offer a guaranteed index linked income (like many public sector schemes), typically remain out of scope of this tax.

Even the House of Lords Economic Affairs Committee has expressed concern about the practical impact of the recent changes. It has warned that bringing pensions into inheritance tax risks causing delays and costs for personal representatives already dealing with estate administration at a time of grief. 

The seven-year rule 

The instinct to give assets away before death is understandable, and for many landlords it can be an effective strategy. When you make a gift to an individual, it becomes what HMRC calls a potentially exempt transfer (PET). If you survive for seven years after making the gift, it falls entirely outside your estate for IHT purposes. 

If you die within seven years, taper relief reduces the IHT charge on a sliding scale from years three to seven, but this is not at all straightforward. There’s a kicker, as the full gift is then included back into the estate.

There are also smaller exemptions worth using annually: each person can give away £3,000 per year free of IHT, and gifts from surplus income — regular payments that do not affect your standard of living — can be made without any limit, provided they are genuinely from income rather than capital. Then there’s the £250 one-off gifts. See https://www.gov.uk/inheritance-tax/gifts 

Gifting property

Landlords should not confuse the IHT treatment of gifts with the Capital Gains Tax position. Gifting property to family members (except your spouse or civil partner) is treated as a disposal at market value for CGT purposes. 

You are taxed as if you sold the property, even though no money changes hands. You must notify HMRC within 60 days of the transfer’s completion. For a property which you purchased decades ago the CGT liability on transfer can be substantial. 

What’s more, the annual CGT allowance has been significantly reduced. It is now just £3,000 per person for the 2025-26 tax year, meaning far more people are now liable for CGT on property transactions. 

The current rates are18% for basic-rate taxpayers and 24% for higher-rate taxpayers on residential property. This is the actual gain between purchase and sale (or market valuation on transfer) prices less buying and selling costs and any capital expenditure while you owned it.

Stamp Duty Land Tax (SDLT) adds a further complication on gifts and transfers. Where a property is gifted, SDLT is charged on the value of any outstanding mortgage transferred with the gift. If a child receiving the property already owns other property, the additional-dwellings surcharge of 5 per cent SDLT will apply. See: https://www.gov.uk/stamp-duty-land-tax/residential-property-rates 

If you gift income-producing property to children under 18, the income may still be taxed on you and if you still receive benefit from the gift (rent) it may still be included in your estate. The same goes for if you gift your own home and continue to live in it – you would need to pay a market rent to stay there – a good strategy if you have extra resources to pass on.

So, the interaction of these three taxes, CGT, SDLT, and IHT makes any gifting of property a complicated affair so always seek professional advice before taking action.

Setting up a trust

Discretionary trusts have long been employed by property-owning families as a means of passing on assets to the next generation while retaining some element of trustee control. 

They are still a legitimate way to reduce tax liability, but they come with costs. The immediate IHT charge on gifts into a trust above the available NRB amounts to 20% at the point of transfer. Over the trust's lifetime, a periodic charge of up to 6% applies every ten years, with exit charges when capital is distributed. Trusts need to be administered, and the trust itself must produce an annual self-assessment tax return.

The 2024 Budget introduced restrictions on the use of Agricultural Property Relief (APR) and Business Property Relief (BPR) within trusts created after October 2024. In time all trusts will be subject to a £2.5 million cap on these reliefs. It means previous trust planning strategies will be affected once the trust reaches its 10-year anniversary. 

Despite the complexities involved with trusts, they offer CGT hold-over relief when property is transferred in. This means the immediate CGT charge can be deferred until the trust disposes of the asset. It therefore rather favours trusts over outright gifts where CGT must be paid within 60 days.

Family investment companies

There is a growing option for landlords, especially if their properties are already held within a corporate structure, the Family Investment Company (FIC).

There’s been a big rise in landlords buying their investment properties through limited companies. This is estimated to be in the region of 50 per cent of all new buy-to-let purchases. By this method it makes the use of a FIC structure for landlords an ideal long-term way to hold property and more easily pass it to the next generation. 

A FIC consists of a private company whose shareholders are family members. It is structured with different classes of shares giving different rights over income, voting, and capital. 

Parents will typically retain voting control and income rights, while the children receive shares that benefit from future growth in value. These are often known as "freezer shares" and as such mean that appreciation accrues outside the parents' estate. 

A big benefit with companies is that for a portfolio of rentals held within a company, the Section 24 mortgage interest restriction does not apply. This makes the FIC a genuinely tax-efficient vehicle for portfolio landlords despite some set-up costs, but these will be much less than for a trust set-up. 

However, there’s a catch. For those landlords holding property personally (outside of a company) there are added difficulties. To transfer existing properties into a FIC means they face the same issues as transferring as a gift – it will trigger both SDLT and CGT liabilities. It’s better if you can have the company purchase new property directly.

The FIC - unlike a discretionary trust - avoids the sometimes-expensive trust set-up, the 10-year periodic charge or exit charges. But this is a big but here, a FIC does not qualify for Business Property Relief, meaning it is exposed to IHT at 40%. The shares will remain in the parent’s estate unless they are gifted, they then become PETs and subject to the seven-year rule.

Act earlier rather than later

Every tax planning strategy involves pros and cons and trade-offs. It means there’s no strategy that comes without careful and personal circumstance professional advice from your trusted advisor: accountant, a trust specialist, and independent financial advisor and /or a solicitor. For some aspects, they need to work together. 

Frozen tax thresholds and constantly rising property values mean that estate planning should be done sooner rather than later. Those families who grasp the nettle early can derive considerable financial benefit for the generation. Legitimate tax planning tools do exist; they are there to be used.