Navigating Inheritance Tax with Buy to Let Properties

Rising interest rates and rising inflation has seen the buy to let (BTL) dream for many disappear, particularly those faced with the challenge of remortgaging following significant jumps in mortgage rates.

We are frequently asked “how can I plan to reduce my Inheritance Tax bill if I own one or several buy to let properties”?

Generally, the options available are to either gift some of the properties, sell some of the properties or retain the properties and then use life assurance to partially or fully fund the Inheritance Tax bill.

Let’s look at your options in more detail.

IHT strategies for Buy to Let owners

Gifting BTLs – outright gift

If you simply gift a BTL property this will be a disposal for capital gains tax (CGT) calculations and the gains will be subject to 18% or 28% CGT following the gift. The gift will start the seven-year clock for IHT purposes, similar to any other cash-based gifts.

Unfortunately, if your gain is large you may struggle to find sufficient cash to pay the CGT.

Additionally, with CGT being rebased on death, older investors may not wish to incur any liability, albeit adopting this strategy does nothing to address the IHT.

Gifting BTLs into a discretionary trust

Another option would be to “gift” the BTL into a discretionary trust and it may be possible to roll over the capital gain by using holdover relief. Similar to a BTL gift, the seven-year clock for IHT purposes would start following the transfer into trust.

The challenge comes when the property is valued in excess of £325,000 for an individual or £650,000 for a couple and an IHT entry charge may apply when setting up the trust.

The trust may be subject to ongoing IHT charges (periodic and exit charges), and the rental income will be payable to the Trustees and taxed at 45%.

Ordinarily, once the property is in trust, you cannot continue to receive the rental income for the trust to be effective from an IHT perspective.

Selling BTLs

If the two gifting options are unappealing, you could consider selling and using the proceeds (net of any CGT due) to undertake alternative IHT planning.

One option might be to roll the BTL proceeds into an Enterprise Investment Scheme (EIS), which can potentially provide Income Tax relief, CGT deferral and IHT relief after two years, but current EIS options must be viewed as a high-risk investment solution.

If you need to replace some of the rental income, there are two possible options.

  1. Set up a modern flexible reversionary trust which can allow annual payments back to you, along with some significant other IHT and family benefits.
  2. Invest some of the net BTL proceeds into Business Relief investment strategies which can provide ongoing access and control, no need to create a trust and 100% exemption from IHT after just two years.

Finally, if you have no need for the sale proceeds, no need for any replacement income and no concerns about making outright gifts, then a straightforward cash gift may be suitable.

Using life assurance to fund the IHT

If you choose not to sell your BTL property, you could simply take out a life assurance policy which could pay part or all of your IHT liability.

Typically, the life assurance policy will be wrapped inside a trust so policy proceeds can be paid before the need to obtain a Grant of Probate.

Life assurance premiums can use part or all of your annual gifting allowance, but this is a relatively complex area, and we are happy to advise.


If your current estate is mainly comprised of BTL properties, IHT planning can be challenging but still possible.

Consideration should be given to combining some of the above options to achieve a robust and satisfactory overall IHT mitigation strategy.

If you have a question about your approach to IHT with BTL properties, then please complete the form below or give us a call on 01825 76 33 66.


This guide is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
The value of investments may go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance. The value of investments and the income from them may fall or rise and investors may get back less than they invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances. Generally, life assurance plans have no cash in value at any time and will cease at the end of the term. If premiums are not maintained, then cover will lapse. The Financial Conduct Authority does not regulate some aspects of Trust, Tax and Estate Planning.
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