Gifting property – some tax points to consider

⚠️The information on this page applies only to UK residential property and where the individuals concerned are UK resident and UK domiciled.

Gifting property to someone else – especially if it is the home you live in – can be very complicated. There are various tax considerations.

Inheritance tax and capital gains tax are usually the main two direct taxes that you will need to think about, but you might need to think about income tax too. Stamp duty land tax (or land and buildings transaction tax in Scotland or land transaction tax in Wales) also needs to be dealt with. There are also other legal and practical considerations to bear in mind.

Am I likely to have an inheritance tax liability?

First things first. If you are thinking about gifting your home because you are worried about inheritance tax, it is important to understand whether your estate on death is likely to have any inheritance tax liability at all.

This depends on:

1. the value of your estate, so you need to think about how much the things you own are worth. This may include the value of previous gifts and things you are treated as if you own – such as assets in some types of trust; and

2. any available reliefs, exemptions and ‘nil rate bands’, which might reduce the possible inheritance tax.

You might need help working this out from a professional adviser. But even if you do see a professional, you should make a list of what you own and what it might be worth before you go to an appointment. This could save time and help you to answer any questions you are asked.

We outline below some further information on inheritance tax exemptions and nil rate bands which might be useful to read about to give you an idea of whether there might be any inheritance tax to pay on your death.

Gifts that are exempt from inheritance tax

Usually, assets you leave to your spouse or civil partner on death will be completely exempt from inheritance tax. You can read more about exempt gifts on death here.

‘Nil rate bands’ for inheritance tax

For any assets held on death that are not subject to an inheritance tax exemption, a ‘nil rate band’ might apply – meaning inheritance tax might technically be due, but at a zero rate. So it might be that nothing is payable. For example:

• Nil rate band: Your estate may be entitled to an inheritance tax ‘nil rate band’ of £325,000.

• Residence nil rate band: In some circumstances, your estate might also benefit from the ‘residence nil rate band’ of up to £175,000.

• Transferable nil rate band(s): If you had a spouse or civil partner who died before you, and they did not fully use up their ‘nil rate band’ or ‘residence nil rate band’ on death, your personal representatives (those who are dealing with your estate and calculating any inheritance tax after you have died) can claim the unused share of your spouse’s/civil partner’s nil rate band(s).

You can read more about the nil rate bands and transferable nil rate bands, along with some examples, here.

If I gave away my home now, would it save inheritance tax?

If, having considered the potential value of your estate and the nil rand band(s) available to you, you think inheritance tax might be payable, should you give away assets now to reduce the tax on death?

The answer depends on the circumstances.

Note that giving away a property can also trigger capital gains tax and other tax liabilities, as we explain further below.

Direct gifts to another person where you do not benefit further from the asset

Direct gifts made during a person’s lifetime are called Potentially Exempt Transfers (PETs).

By ‘direct gift’, we mean a gift from one person to another. Where instead a gift is made into a trust for the benefit of another person, there can be an immediate charge to inheritance tax, and further ongoing charges.  

Broadly speaking, if you have made a gift which is a PET, you need to survive for seven years from the date of the gift for it to be ignored for inheritance tax purposes when you die. If you die within seven years of making the gift, it is known as a ‘failed PET’. This means that, even though you gave the asset away before your death, inheritance tax might still be payable on it.

Gifts where you still get a benefit from the asset

Even if you live for more than seven years after making a gift, if you continue to use (or otherwise benefit from) the property after giving it away, the property is still likely to be included in the inheritance tax calculation on your death. This is known as a ‘gift with reservation of benefit’ (GWROB).

An example of this would be where you give away a property and continue to live in it without paying full market rent to its new owner. In this case, it is usually the value of the property at the date of your death that is included in your estate – not the value at the date of the gift.

Note that the ‘reservation of benefit’ may happen at any time, even after seven years have passed from the date of the gift.

There are certain exceptions to the reservation of benefit rules, where the future ‘enjoyment’ of the gifted asset is very minor – for example occasionally visiting a house that was previously given away.

Sometimes, the ‘reservation of benefit’ rules might not apply because you are not benefiting from the actual asset given away, but you are benefiting from the value of the gift in some other way. In that case, you may need to pay income tax on the value of that benefit. This is known as pre-owned asset tax (POAT).

An example of where these POAT rules might apply is where you make a gift of cash to another person who then uses the cash to buy a home for you to live in.

However, POAT does not apply if the total annual value of the benefit is no more than £5,000 per year.

We do not cover the detailed rules on GWROB and POAT on this page. We suggest you read about the rules on GOV.UK and seek professional advice, as appropriate.

Should I pay rent for my continued use of the property?

It can be possible to fall outside of the GWROB rules described above by paying a full market rent for your use of a property you have given away. This rental income would then be chargeable to income tax on the new owner(s).

You would need to ensure that the rent paid is genuinely full market value and is reviewed regularly. This is an area that HMRC can challenge. If it is found that the rent paid is less than market value, even if only slightly, then the entire gift might be caught as a GWROB.

If the arrangement is not a GWROB, but instead falls within the POAT rules, the amount charged to income tax is (broadly speaking) the full market rent less any actual rental payments made for the use of the property. Therefore, if a full market rent is paid to the recipient of the gift, then the POAT charge is not applicable.

This is a complicated area and we strongly recommend that you take professional advice from a property lettings expert and a Chartered Tax Adviser.

In any event, the gift would still be a PET (if made to another individual or individuals) and inheritance tax might be payable on the value of the gift if you died within seven years of making it.

Do I pay capital gains tax if I give away my home?

We cover the main capital gains tax principles of making a gift in our separate guidance.

Generally, if you give a property away, then you will be treated as making a disposal for capital gains tax purposes. This means that capital gains tax will be calculated as if the property had been sold for its market value at the time of the gift. However, if the property is your home, then you may be eligible for main residence relief.

If you owe capital gains tax on the transfer, it is likely that you will need to file a capital gains tax report and pay the tax within 60 days of completion. See Capital gains tax reporting and record-keeping.

⚠️ Note: if the person (or persons) you are gifting the property to do not live in that property as their main residence, they might need to pay capital gains tax themselves if they sell or give away that property in their lifetime.

What happens if I give away a rental property?

Like any other gift made directly to another person, this would be treated as a PET. Generally, inheritance tax might be due if you do not live for seven years after making it.

The gift would also be treated as a disposal for capital gains tax purposes. See Do I have to pay CGT if I make a gift to another family member?.

If you need to pay CGT, you are likely to need to make a CGT property report within 60 days of completion. If the property has never been your main residence, you would not be entitled to any main residence relief on the disposal. Partial main residence relief might be due if you had previously lived in the property. However, it is possible to pay that CGT by yearly instalments.

⚠️ Note: It is not possible to take off the capital gains tax paid from any inheritance tax which might be due on a failed PET if you die within seven years of making the gift. In this event, there could be a double tax charge on the same transfer – capital gains tax paid by you during your lifetime, and then inheritance tax paid by your estate (or, in some cases, the recipient of the gift) following your death.

What else do I need to think about?

There can also be stamp duty land tax (or land and buildings transaction tax in Scotland, or land transaction tax in Wales) consequences when giving away a property.

Read more about:

• stamp duty land tax on GOV.UK.

• land and buildings transaction tax in Scotland on Revenue Scotland; and

• land transaction tax in Wales on the Welsh Government’s website.

You should always seek professional advice.

Aside from the tax consequences of making a gift of property, there are many other practical things you need to think about – especially if you are giving away your own home and you plan to stay living there. For example, you need to consider your own security of occupation if circumstances change. This could include issues such as the recipient of the gift getting divorced, becoming bankrupt, or even dying before you – all these issues could threaten your ability to stay in the home.

It is also worth bearing in mind that giving away property might be caught by rules relating to ‘deprivation of assets’ in any financial assessment for care fees by a local authority.

Therefore, deciding to make a gift of your home – or indeed other assets – is not a decision to be taken lightly.

 It is essential that you seek professional advice to fully consider all the potential tax and non-tax implications and to ensure you make an informed decision. It may be difficult or impossible to reverse any decisions made, and the failure of planning may even leave you in a worse position than if you had done nothing at all.

Planning ahead

As a final point, it is always worth thinking about how you might be able to make things easier for your those dealing with your affairs when you pass away.

A good place to start is by having a valid will in place.

It is also useful to keep an up-to-date list of your assets and a secure record of online passwords. When storing passwords, you should take a very cautious approach to ensure you minimise the risk of the information falling into the wrong hands. Ways that you could help to keep this information safe might include:

• asking your solicitor to keep a copy of the passwords securely along with your will (though this might be difficult to maintain if you change passwords regularly for security reasons)

• keeping the information in a locked box, with only your chosen executors having access in the event of your death

• investigating use of an online password storage application, with access available to your executors in the event of your death.