I’m a landlord. Can I pass my flats to my children without inheritance tax due?

In our weekly series, readers can email any questions about their finances to be answered by our expert, Rosie Hooper. Rosie is a chartered financial planner at Quilter Cheviot and has worked in financial services for 25 years. If you have a question for her, email us at money@inews.co.uk.

Question: How can I pass rental properties to my children and cut inheritance tax? I have three children all over the age of 26.

Answer: It is very understandable that you want to pass wealth to your children while reducing their inheritance tax bill. Rental properties often feel like family assets, particularly if they have been owned for many years and have risen significantly in value.

But the first thing to say is that passing on rental properties during your lifetime can create a tax bill now, even if your aim is to save tax later.

If you give a buy-to-let property to your children, HMRC generally treats that as a disposal at market value. In plain English, it is as though you had sold the property, even if no money changes hands. If the properties have been owned for a long time and have gone up substantially in value, this could trigger a large capital gains tax bill.

For 2026-27, capital gains tax is charged at 18 per cent for basic rate taxpayers and 24 per cent for higher and additional rate taxpayers, after the £3,000 annual exemption.

This is the trap many landlords fall into. They look at inheritance tax, which is charged at 40 per cent above the available allowances, and forget that capital gains tax may be payable much earlier.

The standard inheritance tax nil rate band is £325,000, and the residence nil rate band can add up to £175,000 where a qualifying home passes to direct descendants, although it is tapered for estates over £2m.

One option that may be raised in this situation is using a company structure, sometimes called a special purpose vehicle, or SPV, to hold rental properties.

This can be useful for some landlords, particularly where they are building a portfolio for the long term. But transferring existing personally owned properties into a company is not a magic wand. The ownership changes, so capital gains tax may be triggered, and there may also be stamp duty land tax to consider.

There is a possible route called incorporation relief, which can defer capital gains tax where a genuine business is transferred to a company as a going concern. But this is specialist territory.

HMRC’s own guidance says whether property letting amounts to a business depends on the facts, including the scale, regularity and extent of the activity. The Ramsay case is often cited because the taxpayer was found to spend around 20 hours a week on the property business, which helped support the claim for relief.

So, by all means explore incorporation, but do not do it on the basis of a headline idea. You would need specialist property tax advice before moving assets, because getting it wrong could simply bring forward a large tax bill.

There is also a more basic question: do your children actually want to be landlords?

Your three children are adults, so this should not just be a tax exercise done to them. Rental property comes with tenants, repairs, compliance, void periods, interest rate risk and, sometimes, awkward family discussions. What feels to you like a valuable inheritance may feel to them like a responsibility they would not have chosen.

There are also risks in transferring assets outright. Your children may be financially sensible now, but circumstances change. Divorce, debt, business failure or poor decisions can all put inherited property at risk. Passing wealth down is not just about reducing tax; it is also about making sure the wealth lands in a way that helps rather than complicates their lives.

That is why selling one or more properties should not be dismissed. Yes, a sale may trigger capital gains tax. But once the tax is paid, you have liquidity. Cash gives you more planning options. You could make gifts over time, help children with deposits, support pensions or ISAs, use trusts where appropriate, or take out life insurance written in trust to cover a future inheritance tax bill.

Lifetime gifts can fall outside your estate for inheritance tax if you survive seven years, but you need to be comfortable that you will not need the money yourself. Property is illiquid; cash planning is often more flexible.

My starting point would be to map the whole position looking at it from your perspective and theirs before transferring anything: current values, original purchase prices, mortgages, likely capital gains, rental profits, your wider estate, and what each child actually wants. Only then can you compare the options properly: keep the properties, gift them, sell them, incorporate them, or use a mixture.

The right answer may not be the one that produces the lowest theoretical tax bill. It is the one that leaves you financially secure, treats your children fairly, and passes wealth in a form they can actually use.