Jennifer Adams looks at tax implications associated with gifting a property.
There are various situations when one person may wish to gift a property to another. This process brings tax implications depending on the circumstances, and whether the property is a main residence or a second property.
Capital gains tax
The basic premise is that should a property be gifted or sold for less than market value, capital gains tax (CGT) will be payable by the donor if the recipient is a 'connected person' (i.e., a family member, family trust). This rule does not apply if the sale is at 'arm’s length' between two unconnected parties. Gifts to a spouse or civil partner are generally deemed to have been transferred at a value that does not create a gain or a loss. Transfers of assets between spouses or civil partners under a formal divorce or separation agreement or court order are also generally made at no gain or loss.
If the property has been the owner’s main residence for at least part of the ownership period, principal private residence (PPR) relief can be claimed, extending to the last nine months (or 36 months, if the owner has entered long-term care).
Children are deemed 'connected', so there is a disposal for CGT purposes of any property not covered by PPR relief; the disposal proceeds being market value at the date of the gift. The problem here is that as no money changes hands, the donor may incur a ‘dry’ CGT bill as a result of giving the property to the connected person (i.e., as there will be no disposal proceeds from which to pay the bill, the donor will need to find the money from elsewhere).
Inheritance tax
At the time the gift between individuals is made, no inheritance tax (IHT) will be payable. The gift is classified as a potentially exempt transfer and remain free from IHT if the donor lives for at least seven years from the date of the gift.
If the donor survives for more than three years the gift will form part of the donor's estate although taper relief will be available to reduce the IHT tax payable. IHT will be payable on the gift if not covered by the nil-rate band.
Reservation of benefit
A key challenge in IHT planning involving a main residence is that the donor often wishes to continue living there.
Under the 'gifts with reservation of benefit' (GWR) anti-avoidance rules, any gift to a connected person risks being caught by this rule, rendering the arrangement ineffective for IHT purposes and the property being treated as remaining part of the estate upon the donor's death.
The gift of an undivided share of an interest in land is not a GWR if either of the following conditions is satisfied:
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The donor does not occupy the property, or occupies it to the exclusion (or virtual exclusion) of the donee for full consideration (e.g., full market rent).
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The donor and donee both occupy the property, and the donor receives no (or negligible) benefit from the donee in connection with the gift.
While the IHT legislation does not provide a definition for 'virtual exclusion', HMRC’s Inheritance Tax Manual (at IHTM14333 ‘Gift with Reservation') offers examples reflecting HMRC's interpretation. For example, the GWR provisions will not come into play if the donor stays in the property (in the absence of the donee) for less than two weeks each year, or stays with the donee for less than one month each year. Temporary visits (e.g., whilst the donor recovers from treatment following medical treatment) and short-term domestic visits are also allowed.
Pay market rent
To mitigate the GWR charge, one strategy is for the donor to pay full market rent to continue residing in the property.
However, this comes with a disadvantage, because unless there is consistent income, any capital used to pay the rent may be depleted. The rent should be reviewed periodically to reflect market changes.
Joint occupation
In this situation, the donee can remain in the property so long as either the donor continues to meet all expenses, or the donee pays no more than their share.
The occupants will basically need to strictly split all bills fairly.
Pre-owned asset charge
In an attempt to circumvent the GWR rules, a variety of complex schemes have been developed in the past, the most common being the ‘home loan’ or ‘double trust’ scheme. Over time, these schemes have been tested in the courts, leading to the introduction of the ‘pre-owned assets tax’ charge (POAT).
The POAT charge is a separate anti-avoidance measure that can apply even if the GWR rules do not. The POAT rules broadly state that if an asset is gifted or a contribution made towards the purchase of the property and the donor continues to receive some benefit, they are potentially liable to the POAT charge (e.g., money given to a child who buys a flat shortly afterwards and the parent lives in the flat).
This charge is distinct from IHT, functioning instead as an income tax charge based on the annual benefit assumed to be received by the donor from the property. To avoid the charge, a donor may elect for the property to come within the GWR rules instead, with the value of the occupation being measured by using annual rental values.
There exists a benefit threshold of up to £5,000 per annum that is disregarded; however, if the total benefit from the land (and any other items) exceeds this amount, income tax will be calculated on the entire value of the benefit (i.e., even the first £5,000 is not disregarded).
Variations of these loan schemes have been attempted by taxpayers, with HMRC challenging them before the tax tribunals. One such example (but where the taxpayer won) is the recent case Executors of Mrs LV Elborne v HMRC [2025] UKUT 59 TCC. Following this decision, HMRC is likely to expedite amendments to IHTA 1984 to counteract similar future schemes.
In 2003, Mrs Elborne sold her home to trustees of a life interest trust, in exchange for an unsecured, zero‑interest loan broadly equal in value to the home at the time when the home loan scheme was implemented. She retained a life tenancy, living rent‑free (but paying all expenses) until her death. The loan note was then gifted to the trustees of a second life interest ‘family’ trust from which Mrs Elborne was excluded from benefit, which satisfied the PET conditions by her surviving for seven years.
The executors agreed that the value of the property in the life interest trust was chargeable in the estate due to her qualifying life interest (this being a pre-2006 settlement) but claimed a reduction in value by the amount of the outstanding debt (the loan note). Furthermore, as the loan note had been gifted more than seven years before death, it could not be chargeable in her estate, unless there was a GWR. HMRC disagreed and disallowed the loan note deduction.
The Upper Tribunal ruled that no benefit had been reserved, stating that it was irrelevant to the holder of the loan note (i.e., the trustees of the family settlement) where Mrs Elborne lived.
Stamp duty land tax/ Land and Buildings Transaction Tax/ Land Transaction Tax
On making a gift, normally, no stamp duty land tax (SDLT), is due by the recipient if no money changes hands.
However, when a property is transferred with a mortgage and that mortgage is taken on by the recipient, SDLT is due on the value of the debt transferred.
The same rules exist under the Land and Buildings Transaction Tax (LBTT) in Scotland and Land Transaction Tax (LTT) in Wales.
Practical tip
In July 2025, the government published draft legislation proposing that from 6 April 2027, unused pension funds are generally included in a deceased’s estate for IHT purposes. Should the legislation be enacted in its current form, many estates that previously fell below the IHT threshold could now be caught, potentially triggering a 40% tax charge. Some financial advisers are considering equity release to mitigate this additional IHT exposure, particularly where property constitutes a significant portion of their clients' estate. By unlocking tax-free cash, money could be gifted during the donor's lifetime (noting the seven-year PET rule), thereby reducing the value of their taxable estate for IHT purposes.
