What happens to my investment property if I die?

An unpleasant subject yet one that is very important, especially to investors as in the event of death, without pre-planning a buy-to-let property or portfolio can become problematic for the intended beneficiaries.

During the stages of planning for investment and process of purchasing, we’re often asked what happens to my investment property when I die?

Below we highlight the steps to be taken to ensure your assets are protected and beneficiaries inherit what you intend for them when the time comes.

Make a Will

Firstly, it’s imperative to make a Will if you own an investment property, and not just a standard Will as that is unlikely to suffice, a specialist Will can ensure your assets are protected properly.

If you die without a Will your properties might pass onto unintended beneficiaries. It’s also important to update your Will regularly so that it is accurate.   

If you’re based abroad buying property in the UK the advice is often to have a Will in your country of domicile and also have separate Wills in any country which you hold property assets. To avoid any confusion having an overarching worldwide Will which covers your estate away from those set up in the countries where you hold assets is recommended.

Thirlmere Deacon strongly recommends investors talk to appropriate professionals who can ensure they have the appropriate arrangements in place unique to their circumstances.

Inheritance Tax on buy-to-let property

Though the beneficiaries of your Will won’t have to pay Stamp Duty Land Tax, Income Tax or Capital Gains Tax at the time when they inherit the property, Inheritance Tax should be factored into planning for your estate.  

Should a beneficiary have to find the funds to pay the 40% Inheritance Tax bill, it might affect your legacy as property might have to be sold to clear the amount owed.   

Investment property doesn’t qualify for Business Property Relief so investors should speak to their advisors and put in place alternative tax-saving strategies.

It’s always wise to plan for this tax in advance and we would always recommend that our clients speak with a qualified tax adviser for guidance on Inheritance Tax.

Capital Gains Tax on inherited property

There’s no Capital Gains Tax to be paid at the time of inheriting as any accumulated gains are wiped out upon the property owner’s death and the beneficiary will inherit the property at its probate value.

However, if the beneficiary continues to rent the property out and goes onto selling the property further down the line the Capital Gains Tax will be calculated based on the change in value from the previous owner’s death to the point of sale.

What happens to my mortgage when I die?

When someone inherits a property that has a mortgage they will be responsible for the monthly repayments.

Many investors choose to set up life insurance that can be used to clear any outstanding mortgages.

Checking the terms of your mortgage can allow for logical planning, it is usually the case that payments are frozen until probate is finalised but in some instances, interest might continue to build during that period.

A beneficiary might choose to sell the property if they do not feel they can take on the responsibility of the mortgage or they can decide to take out a new mortgage which will start after probate is granted – for investment property they’ll need a buy-to-let mortgage.

Inheriting a property with a tenant in situ

The Executor of your Will should be granted the power to manage any rental properties until they are transferred to the beneficiaries.  

If going to only one party, once the property is transferred into the beneficiaries name, new tenancy agreements will need to be drawn up by the new owner.

The new beneficiary will take on the responsibilities as a landlord so it can be useful to have a good management company taking care of things.

Beneficiaries will have to pay Income Tax on the rental income generated from the inherited property.

Setting up a company or trust

For varying reasons, investors choose to hold investment properties in company structures or in trust.

Either option has different outcomes, Inheritance Tax can be due on both structures, depending on how transfers are made. For example, Inheritance Tax applicable to trusts depends on the type of trust.

As we are not tax advisors we always recommend our clients speak to a professional when choosing the best structure for their circumstances.

Serious illness

Another time that this question is sadly relevant is in the instance that you as an investor are unable to manage the property due to a serious illness or accident.

It can be sensible to set up a Lasting Power of Attorney document to enable a trusted party to look after the finances and manage assets should you not be able.  

Planning for the future

Handing your loved ones a well-managed portfolio of properties that have been structured in a tax-efficient way and that will cause minimal problems upon your death, simply moving into their name with plans in place for this to happen smoothly can be hugely reassuring.

Much of this planning must be done with the assistance of professional tax advisers, accountants and solicitors. Which properties you’re adding to your portfolio in order to leave an impressive legacy for your loved ones is something Thirlmere Deacon can competently advise on.

Speak to a member of our team regarding your ambitions for your investment property portfolio.

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