Can we gift our buy-to-let properties to our son and avoid inheritance tax?

Inheritance tax can be avoided up to a certain threshold if both parents survive for seven years after making the gift. Stamp duty would be payable on the value of the mortgages and there may be a capital gains tax liability if the properties have increased in value since purchase.
Question: I am 49 and my 46-year-old wife and I have six buy-to-let properties, all of which are mortgaged at about 60 per cent loan to value. We would like to gift three of these to our son, who is 22, to avoid inheritance tax after seven years. Can we do this and will it really avoid inheritance tax, assuming we are around for many more years to come?
 
Answer: If you make your rental properties a gift to your son, this will be a potentially exempt transfer for inheritance tax purposes. If you both survive by seven years, the gift will be fully outside the charge to inheritance tax, so none will be payable.
 
A married couple has a joint nil-rate band of £650,000. If your gift exceeds this value and a death occurs three to seven years after the gift, then taper relief is available to reduce the inheritance tax payable. The general rate payable is 40 per cent.
 
Do note that you must not continue to enjoy the properties or the income from them, otherwise the gift will be ineffective for tax purposes.
 
There is also a potential capital gains tax liability if the properties have increased in value since you purchased them. The value used to calculate the gain would be the market value at the time of the gift, and the rate of capital gains tax is up to 28 per cent.
 
Finally, there would be stamp duty to pay on the value of the mortgages because your son is taking them over, and this would be treated as payments to you for the properties.
 

What's your problem?
If you have a question for Fiona McNulty, please email legalsolutions@standard.co.uk or write to Legal Solutions, Homes & Property, London Evening Standard, 2 Derry Street, W8 5EE. We regret that questions cannot be answered individually but we will try to feature them here. Fiona is legal director in the real estate group of Foot Anstey LLP in Exeter (fiona.mcnulty@footanstey.com)
 
These answers can only be a very brief commentary on the issues raised and should not be relied on as legal advice. No liability is accepted for such reliance. If you have similar issues, you should obtain advice from a solicitor.

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