The tax implications of gifting property to children

There are numerous reasons one might want to transfer the ownership of a property to their child. Gifting properties to your children can be a complex matter as there are many tax considerations involved in relation to Capital Gains Tax (CGT), Inheritance Tax (IHT) and Stamp Duty Land Tax (SDLT) when you are planning to do so.

Can I gift property to my children?

In short, yes you can gift property to your children. However, there are tax implications to consider when doing so.

Processes to gift property to children

To gift property to children the process will depend on whether the child is minor or over 18. If the child is over 18, you can simply transfer the property to the children. The property will only become chargeable to IHT if the donor passes away within seven years of the gift. However, there will be CGT implications which we will go into further down in the article.

For minor children, you can either transfer the property into an informal trust (“Bare Trust”) or into a formal trust structure, as they are unable to legally own real estate under 18. Once the child is over 18, they will then gain ownership of the property. The main difference between the two structures is you will be able to retain an element of discretion over the property transferred. In comparison, under a Bare Trust, any income is legally the child’s and once they have turned 18 they will have unlimited control over the property.

You must ensure that the property is below the NIL rate band of £325k, otherwise there is an immediate charge to IHT of 20%. This only occurs if the property is transferred into a formal trust structure and does not occur if a Bare Trust is established.

It is important to also ensure that the donor does not benefit from the property – otherwise the property would remain part of the estate and IHT would be payable under the normal rules. If the donor will remain in the property after the gift, they will have to pay rent at market rate.

Capital Gains Tax

There may be CGT due on the gifting of a property to your children. The normal CGT rules apply on the donor who is effectively “disposing” of the property. Therefore, the normal reliefs apply if you are gifting your main residence as opposed to a second home or buy-to-let.

Gifts made to children are made at market value. The disposal value of the property will therefore be the market value of the property at the date of transfer. CGT is calculated on the difference between the original cost of the property less the market value at transfer and any costs associated.

For the 2024/25 tax year, there is an annual allowance of £3,000 on capital gains, which is tax-free. The balance is taxed at the appropriate tax rate. This is dependent on whether you are a basic rate taxpayer or a higher/additional rate taxpayer. The gain is taxed through the bands, and therefore a combined rate may apply.

If the property is bought and gifted immediately to a child, then there should be no taxable gain on the basis there is no increase in value between the dates of purchase and gift.

Where the property gifted was the donor’s main resident, you may consider Principal Private Residence (PPR) relief, which may exempt some or all of the gains from CGT. Additionally, if the recipient then lives in the property as their main residence, they may also qualify for PPR relief when they come to sell the property.

For disposals of UK residential properties by non-residents, where you owned the property before 6 April 2015, the standard approach for calculating the gain is to use the market value on 5 April 2015.

With regards to commercial property disposals by non-residents, if you owned the asset before 6 April 2019, the standard approach for working out the gain is to use the market value on 5 April 2019.

It is noted that disposals of UK residential property must be reported to HMRC within 60 days of completion/gift and any tax that is payable is also due. This does not apply to commercial properties.

Anyone who is planning on selling or gifting residential property should consider getting in touch with their tax adviser to ascertain whether there is a reporting requirement under the 60-day rules.

Are you required to pay SDLT on gifted property?

It depends on whether there is a mortgage on the house. Your child will not have to pay SDLT if there is no mortgage. If there is, they will have to pay stamp duty on the value of the outstanding loan.

You need to seek agreement from your bank or building society on the transfer of equity before you can give it away, as they will likely check whether the recipient will be able to afford the mortgage repayments.

They might not agree to do this if your child has no income or earning a lot less than you, but you can consider acting as a guarantor on the mortgage.

Inheritance Tax

When someone dies, IHT can be charged at a maximum rate of 40% on your estate of the estate value above £325,000 (or £500,000 where a main residential property is passed on death to a lineal descendant such as children or grandchildren and the total value of the estate is less than £2 million). An estate generally includes all property, savings and any possessions. Therefore, it is worth planning ahead to gift assets surplus to requirements during an individual’s lifetime to reduce the value of the estate.

There is normally no IHT to pay if the donor survives seven years from the date of the gift. Where the donor survives at least three years, but less than the full seven years, a tapered IHT rate applies. See the table below:

However, if the donor retains an interest in the property, i.e. gift their family home to children but continues to live in it this is considered as a ‘gift with reservation of benefit’. If this is the case, the property remains in their estate, which will be taxed in full on death. The donor can pay the children the full market rate rent to successfully remove the property from their estate. The recipient/s may be subject to Income Tax on the rent received. Partial gifts of property are also possible and, in those circumstances, it would be advisable for the recipient of the gift to pay their gifted share of the property’s running costs as otherwise, HMRC could argue there has been no proper transfer of ownership.

Income tax

One could consider gifting a rental property that has income to children, to fully utilise their Income Tax personal allowance and their lower tax rate bands. However, where parents gift assets to children aged under 18 years old, any net income exceeding £100 per annum is taxed on the parents as if they still owned the asset, under the parental settlements rules. This rule does not apply to income generated when gifts are from grandparents.

Summary planning points

Depending on the reasons behind the gift of the property, you may consider the following planning points:

• Gifting the post-tax rental income instead, if the donor wishes to retain ownership and control of the asset.
• Gift a proportion of the property to an adult child, this way, although there are tax issues as discussed above, it provides an income stream equal to their percentage ownership of the asset. Children can use their personal allowance or lower tax rate to fully utilities the tax benefits.
• If you gift your main home to one of your children, you are no longer the homeowner and have no rights to the property. If PPR applies, then there are no CGT consequence and no SDLT payable on the basis that there is no mortgage on the property.
• A gift of an investment property would, in most cases, be preferable as it does not mean giving up the family home, albeit this can often work well where elderly parents have to move into full time care.

In summary, gifting properties to your children can be a complex matter as there are many tax considerations involved, therefore it is best to consult a professional tax adviser before you take any actions.