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Gifting Property to Family: IHT and Will Implications in the UK

· 27 min

Note: The following scenario is fictional and used for illustration.

David and Patricia, both 68, owned a £420,000 house in Surrey outright and wanted to help their daughter Emma buy her first home. In 2019, they transferred the house into Emma's name via a deed of gift, believing the 7-year rule would eliminate inheritance tax. They continued living in the house rent-free, assuming this was fine since Emma owned it.

When David died in 2024 (five years later), HMRC assessed the house as a "gift with reservation of benefit" because he lived there rent-free. The family expected no IHT bill since the property had seemingly been gifted. Instead, they faced a £38,000 tax bill (40% of half the property value over the nil-rate band) plus professional fees to unravel the situation.

The gift hadn't worked for IHT purposes, and Emma now technically owned a house her surviving mother lived in, creating legal and financial complications.

Property gifting seems simple, but it has invisible tax traps that can cost families tens of thousands. One wrong assumption—like thinking you can live rent-free in a gifted property—can void the entire IHT benefit. 22% of lifetime mortgage applications in H1 2025 cited gifting as the purpose, up from 13% in H1 2024, while inheritance tax receipts reached £5.2 billion in April-October 2025.

This article explains exactly how property gifting works for IHT purposes, what triggers "gift with reservation" status, when capital gains tax applies, and how to structure property gifts correctly to achieve your goals without costly mistakes.

Table of Contents

Why Property Owners Consider Gifting to Family

The IHT threshold has been frozen at £325,000 since 2009, with the residence nil-rate band at £175,000 (total £500,000 for individuals leaving a home to children). This means a £420,000 house could trigger anywhere from £0 to £48,000 in IHT depending on your circumstances.

With 40% tax on estates above the threshold, many property owners face a difficult reality. 53% of UK adults own property, with 28% owning outright, and house prices continue rising while thresholds remain frozen. This creates an ever-widening gap between property values and tax-free allowances.

The desire to help children during your lifetime rather than making them wait for inheritance is completely natural. Parents gifted a record £29 billion to help first-time buyers between 2018-2020, recognizing that property wealth could make a real difference to their children's lives today.

James, 64, wants to gift £150,000 in equity to help his son buy his first home while he can see him enjoy it. Sarah, 71, owns a £680,000 house and is concerned about the potential £72,000 IHT bill her children might face. Michael and Lisa want to downsize and gift their family home to their daughter who has young children.

These are legitimate motivations. But property gifting requires proper planning to achieve your goals without triggering unintended tax consequences or losing control of your most valuable asset.

This article addresses the law in England and Wales. Scotland and Northern Ireland have different property and tax laws—consult local specialists if you're resident there.

Understanding the 7-Year Rule for Property Gifts

When you gift property to family members, it becomes a Potentially Exempt Transfer (PET). If you survive for seven years after making the gift, it becomes fully exempt from inheritance tax. Your family pays nothing.

If you die within seven years, the gift is assessed against your £325,000 nil-rate band. Gifts made in the first three years are taxed at the full 40% rate. Gifts made between three and seven years benefit from taper relief, which reduces the tax rate on a sliding scale.

Here's how taper relief works:

Years between gift and death Tax rate Effective rate
Less than 3 years 100% 40%
3 to 4 years 80% 32%
4 to 5 years 60% 24%
5 to 6 years 40% 16%
6 to 7 years 20% 8%
More than 7 years 0% 0% (exempt)

Taper relief only applies if the total value of gifts exceeds the £325,000 nil-rate band. If your gifts fall within this allowance, there's no tax anyway.

The annual £3,000 gift exemption doesn't meaningfully help with property because property values far exceed this amount. The seven-year clock starts from the date of legal completion, not the date you decide to make the gift.

Let's look at a specific calculation. Emma gifts a £400,000 property in April 2020 and dies in June 2024 (four years and two months later). The gift is £75,000 over the nil-rate band (£400,000 minus £325,000). This falls in the four-to-five-year bracket, meaning 60% of the full rate applies, giving an effective rate of 24%. Tax due: £75,000 × 24% = £18,000.

Common misconceptions create costly mistakes. The 7-year rule doesn't mean "no inheritance tax if I gift property"—it only works if you survive seven years AND avoid gift with reservation status. The clock doesn't start when you decide to gift; it starts at legal completion. Taper relief doesn't always reduce tax; it only applies if the gift exceeds the nil-rate band.

Understanding these rules is the first step. But as David and Patricia discovered, the 7-year rule is only part of the story.

The Gift with Reservation Trap (The Most Costly Mistake)

This is the trap that catches most property gifters and completely undermines their tax planning.

A gift with reservation of benefit occurs when you give an asset away but continue to benefit from it. Under Section 102 of the Finance Act 1986, the property is treated as never having left your estate for IHT purposes. The seven-year clock becomes irrelevant—the property remains in your estate regardless of how long you survive.

The most common scenario is gifting your house to your children but continuing to live there rent-free. HMRC's requirement is clear: the donor must be "entirely excluded" or "virtually entirely excluded" from any benefit.

To avoid gift with reservation status, you must pay full market rent to the recipient. This means the arm's length rate that an independent tenant would pay. Discounted or nominal rent doesn't satisfy the requirement. The rent payments must be documented and actually paid, not just theoretical.

Joint ownership creates additional complications. If you transfer into joint names with an adult child and both occupy the property, this may not constitute a reservation. However, both parties must occupy their respective shares from the date of the gift. If your child doesn't move in and you're the only one living there, it's a reservation.

Consider Robert's situation. At 70, he gifts his £500,000 house to his son Tom while continuing to live there paying no rent. Robert dies eight years later, well past the seven-year rule. HMRC treats this as a gift with reservation—the house remains in Robert's estate.

If Robert doesn't qualify for the residence nil-rate band, the IHT calculation is (£500,000 minus £325,000) × 40% = £70,000 in tax. The gift achieved nothing except creating legal complexity around property ownership.

How can you avoid this trap?

Pay market rent from day one of the gift and get a professional valuation first. Keep detailed rent payment records and formalize the arrangement with a tenancy agreement. Alternatively, move out of the property entirely.

You could also consider alternative structures like trusts or a sale with reserved life interest, though these require specialist advice.

There's also the Pre-Owned Assets Tax (POAT) introduced in 2004. This is an alternative income tax charge on the benefit you receive. You can elect to pay income tax annually on the benefit OR accept that IHT will be due on death. You must file form IHT500 by 31 January after the tax year of the charge.

The gift with reservation rules exist to prevent estate planning abuses. They're not a technicality—they're the primary reason why property gifts fail for IHT purposes. Professional advice is essential to structure your gift correctly from the outset.

Capital Gains Tax on Property Gifts

While you're focusing on inheritance tax planning, capital gains tax often creates an immediate and unexpected bill.

Gifting property to family members (except your spouse or civil partner) is treated as a disposal at market value for CGT purposes. You're taxed as if you sold the property, even though no money changes hands.

You must notify HMRC within 60 days of completion. The gain is calculated as market value at the gift date minus your original purchase price minus allowable costs like solicitor fees and stamp duty.

The annual CGT exemption for 2024/25 is just £3,000—minimal help for property gains. CGT rates for 2024/25 are 18% for basic-rate taxpayers and 24% for higher-rate taxpayers on residential property.

Private Residence Relief can eliminate or reduce the CGT bill. If the property was your main home throughout your ownership, you usually pay no CGT. Partial relief applies if it was only your main home for part of the ownership period. The final nine months of ownership are always exempt (this was previously 18 months).

Relief is reduced if you used the property for business or let it out during your ownership.

Here's a calculation example. Susan gifts a buy-to-let property to her daughter worth £350,000. She bought it in 2008 for £180,000. The gain is £170,000 minus the £3,000 annual exemption, leaving £167,000 taxable. As a higher-rate taxpayer, Susan pays £167,000 × 24% = £40,080 in CGT. This must be paid within 60 days of completion.

Hold-Over Relief allows CGT liability to be deferred and passed to the recipient, but it's only available for business assets and certain trusts. It's not generally available for residential property that's not a business asset.

The recipient's position is also important to understand. They inherit your base cost—there's no step-up in basis. If they sell the property later, their gain is calculated from your original purchase price. This is worse than inheriting on death, which gets a step-up to probate value.

Compare the two approaches:

Lifetime Gift Inheritance on Death
IHT 7-year rule applies Taxed as part of estate
CGT Donor may pay CGT now No CGT (probate value becomes base cost)
Base cost Original cost transferred Stepped up to probate value
Recipient's future CGT Potentially higher Potentially lower

Tax treatment depends on your individual circumstances and may change in future. HMRC has specific time limits and reporting requirements for property gifts. You should obtain professional tax advice from a qualified accountant or tax adviser before proceeding with property gifts.

CGT is often forgotten in the rush to plan for IHT, but it's a real immediate cost that can significantly impact the financial benefit of gifting property.

Care Home Fees and Deliberate Deprivation of Assets

Property gifting can backfire spectacularly when care needs arise unexpectedly.

Local authorities assess your assets to determine care funding eligibility. For 2024/25 and 2025/26, the capital threshold in England is £23,250 for means-tested support. Property can be included in the assessment unless it's occupied by certain relatives.

Deliberate deprivation of assets rules allow local authorities to assess notional capital—treating you as if you still own assets you've given away.

What counts as deliberate deprivation? Gifting property or assets specifically to avoid care fees. Selling property significantly under market value to family. The local authority examines your intent and timing—gifts made close to a care need are particularly suspicious.

The burden of proof is on the local authority, but they have wide investigatory powers. They review bank statements, property transactions, and interview family members to establish whether you deliberately deprived yourself of assets.

If they find deliberate deprivation, the consequences are severe. The local authority treats you as still owning the property's value (notional capital). You're assessed as if you have assets even though you don't. You must pay for care but have no funds to do so, creating debt. In some cases, the local authority may pursue the recipient to recover costs.

Timing matters significantly. A gift made years before any care need was anticipated is likely acceptable. A gift made when care needs were imminent or anticipated will likely be deemed deliberate deprivation. There's no specific time limit, but authorities focus practically on recent gifts.

Consider Margaret's situation. At 79, she was diagnosed with dementia in 2022 and needed care by 2024. In 2023, she transferred her £380,000 house to her son to "protect it from care fees." In 2024, she moved to a care home and applied for funding, declaring no assets.

The local authority investigation found the 2023 transfer and deemed it deliberate deprivation. Margaret was assessed as having £380,000 in notional capital. She must self-fund care at £1,000+ per week despite having no accessible funds. Her son now owns the house, but his mother has mounting care debt.

What's the difference between legitimate planning and deliberate deprivation?

Long-term estate planning with no immediate care need is acceptable. Helping children buy homes when you're healthy is legitimate. Transferring assets when care needs are foreseeable is problematic. Explicitly stating your goal is to avoid care fees will be used as evidence against you.

Protective steps include documenting legitimate reasons for the gift, such as estate planning or helping family. Obtain professional advice confirming the appropriateness of the gift. Don't make gifts if care needs are anticipated within five or more years.

This creates unintended financial hardship for many families who thought they were protecting their legacy.

The Legal Process - Deeds of Gift and Land Registry

Understanding the practical mechanics of property gifting helps you appreciate why professional help is worth the cost.

The legal document required is a TR1 Transfer form from the Land Registry, usually called a "Deed of Gift" or "Transfer for Nil Consideration." You'll need accompanying forms: AP1 (application to register) and ID1 (identity verification if no solicitor is involved).

The property must be owned outright with no outstanding mortgage. If a mortgage exists, it must be paid off before the transfer, or the recipient must assume the mortgage (which triggers Stamp Duty Land Tax).

The process involves eight steps. First, obtain professional valuations needed for tax purposes. Second, take legal advice with solicitors recommended for both sides. Third, complete the TR1 form with donor and recipient details. Fourth, declare nil consideration (no payment).

Fifth, both parties sign before witnesses. Sixth, submit to the Land Registry with AP1 and fees. Seventh, notify HMRC of CGT disposal within 60 days. Eighth, keep records for IHT purposes to track the seven-year period.

Costs involved include solicitor fees of £500-£1,000+ depending on complexity. Land Registry fees range from £40-£910 depending on property value. Professional valuation costs £150-£500. CGT may apply as calculated earlier. Stamp Duty Land Tax is generally not payable on outright gifts but is payable if a mortgage is assumed.

Indemnity insurance and solvency declarations protect against future bankruptcy claims. A statutory declaration of solvency states your assets and liabilities at the time of the gift. It proves the gift wasn't made to defraud creditors. Specialist indemnity insurance is available as an alternative, costing £50-£200 for insurance or £100-£300 for a statutory declaration.

Why do you need solicitors when the forms seem straightforward?

The complex interaction between IHT, CGT, and SDLT requires expertise. The risk of creating a gift with reservation if structured incorrectly is high. Land Registry requirements can be technical and easy to get wrong. You need protection against future bankruptcy and creditor claims.

The Law Society states that "solicitors must advise them about the benefits and risks" when clients are making gifts of assets. You need to ensure the gift is actually what you intend, not accidentally creating a trust or leaving the gift incomplete.

Consider Peter's experience. He used an online template for his deed of gift to save £800 in solicitor fees. He didn't realize he'd created a gift with reservation because he planned to keep living there. He missed the 60-day HMRC notification deadline for CGT, incurring penalties of £100+. He didn't get a solvency declaration and faced a bankruptcy challenge four years later.

The total cost of his mistakes exceeded £15,000 in tax, penalties, and remedial legal fees. Professional help is cost-effective insurance against expensive errors.

Alternatives to Outright Gifting

Property gifting isn't always the best strategy. Consider these alternatives.

Leaving property in your will avoids lifetime CGT, provides a step-up in basis for your beneficiaries, and lets you retain complete control. Discounted gift trusts allow you to make a gift while retaining income, reducing your estate gradually. Home reversion schemes involve selling a portion to a provider while retaining the right to live there.

Equity release allows you to gift cash instead of property, maintaining ownership while gifting smaller, more manageable amounts. Sale at undervalue creates a partial gift where the recipient gets a mortgage for a portion. Life interest trusts give your spouse the right to live in the property while children receive it on your spouse's death.

Compare lifetime gifting with will bequests:

Factor Lifetime Gift Will Bequest
IHT 7-year rule (PET) Part of estate (40% over threshold)
CGT May trigger CGT now No CGT (step-up in basis)
RNRB Lost if gift made £175,000 RNRB available if to children
Control Lost immediately Retained until death
Care fees risk Deliberate deprivation risk Property assessed if in care
Flexibility Can't undo gift Can change will anytime

When does gifting make sense? You're young or healthy enough to survive seven years comfortably. The property has no CGT liability because it's your main residence. You have other assets to support yourself. You'll move out or can pay market rent. Your relationship with the recipient is completely secure. You understand and accept the loss of control.

When does leaving property in your will make more sense? You need to live in the property without paying rent. The property has a large unrealized CGT gain. You want to retain control and flexibility. Care needs may arise within seven years. You want to use the £175,000 residence nil-rate band. You're uncertain about family circumstances changing.

Consider a hybrid approach. Claire, 66, owns a £550,000 house and wants to help her two children. Instead of gifting the house (which would trigger CGT and control loss), she releases £100,000 equity via a lifetime mortgage. She gifts £50,000 to each child for house deposits. She leaves the house in her will to the children, who will benefit from the full residence nil-rate band and step-up in basis.

Her total estate is reduced by £100,000 immediately, and the rest passes efficiently through her will. This balanced approach achieves multiple goals without the risks of outright gifting.

How Property Gifts Impact Your Will Planning

Property gifting and will planning must work together as an integrated estate strategy.

If you've gifted property during your lifetime, your will needs updating immediately. Your will should acknowledge the gift and explain its context. This prevents children from claiming "unequal treatment" if one child received a property gift while others didn't.

Your residuary estate calculation changes because the property is no longer part of your estate. You need to appoint executors capable of handling lifetime gift records and complex IHT calculations. You may need professional executors if your estate has significant complexity.

Specific will clauses to consider include a letter of wishes explaining lifetime gifts and your reasons for making them. Equalizing bequests ensure that if one child received property, others receive equivalent cash or assets. An acknowledgment clause states: "I have during my lifetime made a gift of [property address] to [child's name]."

Your residue clause must account for the reduced estate value after the gift.

What happens if the property gift fails due to gift with reservation status? The property is unexpectedly back in your estate, and your will needs to dispose of it. If your will says "I leave my house to X" but the house was supposed to be gifted to Y, this creates conflict. Always include a fallback provision.

Consider Thomas's situation. He gifted his house to his eldest son Mark in 2020. His will, written in 2015, said "house to be split between all three children." Thomas died in 2027 having lived in the house rent-free, creating a gift with reservation. The house was back in his estate, and his will said to split it three ways.

Mark claimed he already owned it under the deed of gift. His younger siblings claimed the will said equal split. Litigation costs exceeded £25,000 to resolve and took 18 months.

An updated will should have said: "I have gifted my property at [address] to my son Mark by deed dated [date]. If for any reason this gift is deemed invalid or ineffective for tax purposes, I direct that [fallback provision]."

Triggering events for will updates after a property gift include immediately after completing the deed of gift. If you start living in the gifted property, this changes its reservation status. If the recipient divorces, remarries, or has children, this impacts their inheritance planning. If you acquire new property to replace what you gifted, your will needs updating. Review every three to five years whether your gift strategy still makes sense.

Why does this matter for will planning? Property is typically your largest asset (average UK house prices exceed £290,000). Gifting property creates complexity requiring immediate will updates. Your will must coordinate with lifetime gifts for a coherent estate plan. An outdated will combined with a property gift creates family disputes and unintended outcomes.

Learn more about what to include in your will beyond property decisions, and understand when to update your will after major life events.

Common Mistakes and How to Avoid Them

Learn from the mistakes that cost other families tens of thousands of pounds.

Mistake 1: Living in gifted property rent-free

This happens because people assume a gift is a gift and don't understand reservation rules. The consequence is gift with reservation status, meaning IHT planning fails entirely. Prevention: pay full market rent with a documented tenancy OR move out completely.

Mistake 2: Forgetting about capital gains tax

People focus exclusively on IHT and assume there's no tax on a "gift." The consequence is an unexpected tax bill within 60 days and penalties for late notification. Prevention: get a CGT calculation before proceeding and check whether Private Residence Relief applies.

Mistake 3: Gifting property then needing care home funding

This happens when people don't anticipate care needs and believe gifts protect assets. The consequence is a deliberate deprivation finding, forcing you to self-fund care with no accessible assets. Prevention: only gift as part of genuine long-term planning, not if care is foreseeable.

Mistake 4: Not updating will after property gift

People assume the gift is separate from will planning. The consequence is that your will disposes of property you no longer own, creating disputes. Prevention: update your will immediately after deed of gift completion.

Mistake 5: DIY deed of gift without legal advice

Trying to save £800 in solicitor fees is tempting. The consequence includes technical errors, missed tax planning opportunities, and no bankruptcy protection. Prevention: use solicitors on both sides—it's a false economy to DIY.

Mistake 6: Assuming 7-year rule starts from decision

Misunderstanding when the clock starts is common. The consequence is thinking you've survived seven years when you haven't, leading to unexpected IHT. Prevention: track from legal completion date and keep deed of gift records.

Mistake 7: Gifting to one child without equalizing estate

Focusing on one child's immediate need (like a house deposit) is natural. The consequence is other children feeling unfairly treated, creating family rifts. Prevention: explain the situation in your will and make equivalent gifts or bequests to other children.

Mistake 8: Not considering recipient's circumstances

Assuming your child will keep the property forever ignores reality. The consequence occurs if they divorce (property enters settlement), go bankrupt (creditors claim it), or your relationship breaks down. Prevention: consider protective trusts, life interest arrangements, or conditions.

Professional advice checklist before gifting:

  • Tax adviser to calculate CGT and IHT impact
  • Solicitor to structure the gift correctly and prepare the deed
  • Financial planner to ensure you can afford to gift and retain enough to live on
  • Valuer to obtain formal market valuation
  • Will writer to update your will to reflect the gift and coordinate your estate plan

These mistakes are entirely preventable with proper planning and professional guidance.

Frequently Asked Questions About Gifting Property to Family

Q: What is the 7-year rule for gifting property in the UK?

A: The 7-year rule means that if you gift property and survive for more than 7 years, your family won't pay inheritance tax on that gift when you die. If you die within 7 years, the gift becomes a Potentially Exempt Transfer (PET) and may be taxed. Gifts made 3-7 years before death benefit from taper relief, reducing the tax rate from 40% on a sliding scale.

Q: Can I gift my house to my children and still live in it?

A: Yes, but you must pay market-rate rent to your children or it becomes a 'gift with reservation of benefit.' If you continue living rent-free, HMRC treats the property as still part of your estate for inheritance tax purposes, defeating the purpose of the gift. This is one of the most common and costly mistakes property gifters make.

Q: Do I have to pay capital gains tax when gifting property to family?

A: Yes, gifting property to anyone except your spouse is treated as a disposal at market value for capital gains tax purposes. You'll be taxed as if you sold the property, even though no money changes hands. You must notify HMRC within 60 days of completion. The only exception is if the property qualifies for Private Residence Relief as your main home.

Q: Can gifting property affect my eligibility for care home funding?

A: Yes. If your local authority believes you gifted property to avoid care home fees, they can treat this as 'deliberate deprivation of assets' and still count the property's value when assessing your finances. The notional capital can affect your eligibility for state-funded care, even though you no longer own the property.

Q: What is a deed of gift and do I need a solicitor?

A: A deed of gift is a legal document that formally transfers property ownership without payment. While you can technically complete the Land Registry forms (TR1, AP1, ID1) yourself, professional legal advice is strongly recommended due to complex tax implications, potential care fee impacts, and bankruptcy risks. Most solicitors charge £500-£1,000 for this service.

Q: What happens if I gift property and then become bankrupt?

A: If you gift property for less than market value and become bankrupt within 5 years, the official receiver or trustee in bankruptcy can reverse the transaction. The property can be brought back into your estate to pay creditors. Solicitors typically recommend either a statutory declaration of solvency or specialist indemnity insurance when gifting property.

Q: How should I record a property gift in my will?

A: If you've gifted property during your lifetime, your will should acknowledge this to prevent disputes and explain the gift's context. If you're leaving property in your will instead of gifting it now, use specific wording identifying the property by address. Remember that property can't be gifted in your will if you've already sold it or given it away during your lifetime.

Conclusion

Gifting property to family requires careful navigation of complex tax rules and potential pitfalls:

  • Understand the 7-year rule but don't rely on it alone—gift with reservation rules can override it completely
  • Calculate both IHT AND CGT before gifting—property gifts can trigger immediate tax liability
  • Never live rent-free in gifted property unless you want it to remain in your estate
  • Consider care fee implications—deliberate deprivation can backfire badly
  • Update your will immediately after gifting property to coordinate your estate plan
  • Get professional advice from a solicitor, tax adviser, and financial planner before proceeding
  • Consider whether leaving property in your will might actually be more tax-efficient

Gifting property to family can be an incredibly generous way to help your children during your lifetime, but it's one of the most complex estate planning decisions you'll make. The tax rules are intricate, the pitfalls are expensive, and the consequences of mistakes can haunt your family for years. With proper planning, professional guidance, and an updated will that coordinates with your gifting strategy, you can achieve your goals without costly surprises.

Need Help with Your Will?

Whether you're planning to gift property or have already done so, your will needs to coordinate with your lifetime gifts. The guidance above helps you understand the tax implications and structure gifts correctly, but your will must acknowledge any gifts made and provide clear instructions for your estate.

Create your will with confidence using WUHLD's guided platform. For just £99.99, you'll get your complete will (legally binding when properly executed and witnessed) plus three expert guides. Preview your will free before paying anything—no credit card required.

Legal Disclaimer: This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.

Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.

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